As filed with the Securities and Exchange Commission on September 30, 2020

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Auna S.A.A.

(Exact name of Registrant as specified in its charter)

 

 

 

Republic of Peru		8011		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)   Avenida República de Panamá 3461 San Isidro, Lima, Perú +51 1-205-3500		(I.R.S. Employer Identification Number)

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

(212) 947-7200

 

 

Copies to:

 

Maurice Blanco Manuel Garciadiaz Davis Polk & Wardwell LLP 450 Lexington Avenue New York, NY 10017		Francesca L. Odell Adam Brenneman Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, NY 10006

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered(1)		Proposed maximum aggregate offering price(2)(3)		Amount of registration fee
Class A shares, par value per share S/1.00		US$100,000,000		US$12,980

(1)	All class A shares will be in the form of American Depositary Shares, or ADSs, with each ADS representing              class A shares. ADSs issuable upon deposit of the class A shares registered hereby are being registered pursuant to a separate registration statement on Form F-6.

(2)	Includes additional class A shares in the form of ADSs that the underwriters have an option to purchase. See “Underwriting.”

(3)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum offering price.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion dated September 30, 2020

PRELIMINARY PROSPECTUS

 

American Depositary Shares

Auna S.A.A.

(incorporated in the Republic of Peru)

Representing            Class A Shares

 

 

This is an initial public offering of                American depositary shares, or ADSs, of Auna S.A.A. (“Auna” or the “Company”). Each ADS represents                class A shares.

We anticipate that the initial public offering price will be between US$        and US$        per ADS (equivalent to approximately S/                 and S/                per class A share, based on the US$/                to S/1.00 exchange rate on                 , 2020). We intend to apply to have the ADSs listed on the New York Stock Exchange (“NYSE”) under the symbol “AUNA.” We intend to apply to have our class A shares listed on the Lima Stock Exchange (Bolsa de Valores de Lima or “BVL”) under the symbol “    .”

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to                  additional ADSs, at the initial public offering price, representing                 class A shares, less underwriting discounts and commissions.

We have two classes of common stock, class A common stock and class B common stock (collectively, our “common stock”). Each share of our common stock represents the same economic interest, except that, as provided in our by-laws, the class A shares benefit from the right to receive a preferred dividend consisting of 100% of any dividends distributed until we have distributed US$1 billion (or its equivalent in soles) in the aggregate in cash dividends. Each class B share of our common stock is entitled to one vote on any matter submitted to a vote of the shareholders. Each class A share of our common stock is entitled to one vote (together with class B shares) on only the following matters submitted to a vote of the shareholders: (i) approval of corporate management and financial statements; (ii) approval of capital increases or reductions; (iii) appointment, or delegation to our board of directors of the appointment, of our independent auditors; and (iv) application of profits. See “Description of Our Share Capital.”

Each class B share is convertible into one class A share automatically upon transfer, subject to certain exceptions. For so long as either Enfoca (as defined herein) and Luis Felipe Pinillos Casabonne hold in the aggregate 10% or more of the outstanding amount of class A shares, we will have a dual class structure. However, if, on any given date, the class A shares held directly or indirectly by Enfoca and Mr. Pinillos Casabonne represent in the aggregate less than 10% of the outstanding amount of class A shares on a combined basis, then on the date of the call for the next annual shareholders meeting following such event, all the class A shares and all the class B shares will automatically convert into one class of common shares with full and equal economic and political rights as provided under Peruvian law on a one-to-one basis.

Following the completion of the offering, Enfoca, our controlling shareholder, will own approximately     % of our class B shares and     % of our class A shares, representing approximately    % of the combined voting power of our outstanding common stock assuming no exercise of the underwriters’ option to purchase additional ADSs. The remaining     % of the class B shares will be owned by Mr. Pinillos Casabonne and certain of our minority shareholders. All class B shares will be held in trust under a trust agreement (the “Trust Agreement”), pursuant to which the trustee will vote all class B shares held in trust as directed by Enfoca irrespective of Enfoca’s aggregate ownership of our common stock at any given time. See “Description of Our Share Capital—Trust Agreement.”

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Neither the ADSs nor the offering has been or will be registered in the Republic of Peru and therefore neither the ADSs nor the offering is or will be subject to Peruvian laws applicable to public offerings in Peru. The information contained in this prospectus has not been, and will not be, approved or disapproved by the Peruvian Securities Commission (Superintendencia del Mercado de Valores or “SMV”) or the BVL. The ADSs may not be offered or sold in Peru except in compliance with the securities laws of Peru.

We are an “emerging growth company” under the U.S. federal securities laws and will be subject to reduced public company reporting requirements.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 26 of this prospectus.

 

		Per ADS				Total
Public offering price		US$				US$
Underwriting discounts and commissions		US$				US$
Proceeds, before expenses, to us		US$				US$

Delivery of the ADSs will be made on or about                 , 2020.

 

 

 

Morgan Stanley		Goldman Sachs & Co. LLC

 

 

The date of this prospectus is                 , 2020.

TABLE OF CONTENTS

 

 

 

		Page
Presentation of Financial and Other Information			ii
Forward-Looking Statements			v
Summary			1
The Offering			15
Summary Financial and Other Information			19
Risk Factors			26
Use of Proceeds			55
Dividends			56
Capitalization			58
Dilution			59
Selected Financial and Other Information			60
Management’s Discussion and Analysis of Financial Condition and Results of Operations			62
Industry			92
Business			111
Management			142
Principal Shareholders			147
Related Party Transactions			149
Description of Our Share Capital			152
Description of American Depositary Shares			166
Taxation			177
Underwriting			183
Expenses of the Offering			191
Legal Matters			192
Experts			192
Where You Can Find More Information			193
Enforcement of Judgments			194
Index to Financial Statements			F-1

 

 

Neither we nor the underwriters have authorized anyone to provide you with any information other than that included in this prospectus or in any free writing prospectus prepared by or on behalf of us. We do not take any responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. Neither we, the underwriters, or any of our or their affiliates have authorized any other person to provide you with different or additional information. Offers to sell, and solicitations of offers to buy, the ADSs are being made only in jurisdictions where such offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs. Our business, financial condition, operating results, and prospects may have changed since such date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our class A shares or the ADSs. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

i

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Definitions

All references to “we,” “us,” “our,” “our company” and “Auna” in this prospectus are to Auna S.A.A., an openly held corporation (sociedad anónima abierta) organized under the laws of Peru and, unless the context requires otherwise, its consolidated subsidiaries.

The term “U.S. dollar” and the symbol “US$” refer to the legal currency of the United States; the term “sol” and the symbol “S/” refer to the legal currency of Peru; and the term “Colombian peso” and the symbol “COP” refer to the legal currency of Colombia.

All references to “EPS” and “EPSs” in this prospectus are to Entidades Proveedoras de Salud in Peru or Entidades Promotoras de Salud in Colombia, as the context requires. EPSs in Peru are private health insurance companies that provide EPS plans, a type of private insurance plan funded through a percentage of contributions to Seguro Social de Salud del Perú (“EsSalud”), the social security regime in Peru. EPSs in Colombia are institutions responsible for collecting and managing funds contributed to the social security system in Colombia and for providing health insurance plans mandated by law in Colombia. See “Industry—The Peruvian Healthcare Sector” and “Industry—The Colombian Healthcare Sector,” respectively, for more detail.

All references to “Enfoca” in this prospectus are to Enfoca Sociedad Administradora de Fondos de Inversión S.A. and/or to the group of entities affiliated with Enfoca Sociedad Administradora de Fondos de Inversión S.A., as the context requires.

Change of Corporate Name and Form

On December 30, 2019, we changed our corporate name from Grupo Salud del Perú, S.A.C. to Auna S.A. Any references to Grupo Salud del Perú herein are references to our company prior to the change in our corporate name. On September 14, 2020, our shareholders approved our conversion to an openly held corporation (sociedad anónima abierta), along with the related amendment to our by-laws and corporate name change from Auna S.A. to Auna S.A.A. Registration of the amendment to our by-laws in the corporations registry of the Peruvian public registry (the “Corporations Public Registry”) is pending and may be subject to objections by the applicable registrar. Our shareholders delegated to our board of directors the capacity to make further amendments to our by-laws only to address any objections the applicable registrar may have.

Financial Statements

Our consolidated financial statements included in this prospectus have been prepared in soles. The audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (“IFRS”). The unaudited condensed consolidated interim financial statements were prepared in accordance with IAS 34 Interim Financial Reporting. The financial information contained in this prospectus includes our audited consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017 and our unaudited condensed consolidated interim financial statements as of June 30, 2020 and for the six months ended June 30, 2020 and 2019, included elsewhere in this prospectus.

Our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2019” refer to our fiscal year ended on December 31 of that calendar year.

We have translated some of the sol amounts contained in this prospectus into U.S. dollars for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate sol amounts to U.S. dollars was S/3.5437 to US$1.00, which was the exchange rate reported on June 30, 2020 by the Peruvian

 

ii

Superintendency of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). We have also translated certain Colombian peso amounts contained in this prospectus into Peruvian soles or U.S. dollars for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate Colombian peso amounts to Peruvian soles was COP1,067.26575 to S/1.00 and the rate used to translate Colombian peso amounts to U.S. dollars was COP3,758.91 to US$1.00, which in each case was the exchange rate reported on June 30, 2020 by the Central Bank of Colombia. These translations are provided solely for convenience of investors and should not be construed as implying that the soles, Colombian pesos or other currency amounts represent, or could have been or could be converted into, U.S. dollars or Peruvian soles, as applicable, at such rates or at any other rate.

On December 27, 2018, we acquired 97.3% of the outstanding share capital of Promotora Médica Las Américas S.A. (“Grupo Las Américas”), a leading healthcare services provider located in Medellín, Colombia. The aggregate purchase price was S/589.3 million (US$166.3 million). We acquired an additional 2.5% of the share capital of Grupo Las Américas on January 3, 2020. The audited financial statements of Grupo Las Américas as of December 26, 2018 and for the period from January 1, 2018 to December 26, 2018, together with the notes thereto, were prepared in accordance with IFRS and are included elsewhere in this prospectus.

Rounding

Certain figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

Non-GAAP Financial Measures

We use EBITDA, Segment EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in this prospectus. A non-GAAP financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.

We calculate EBITDA as profit for the period plus income tax expense, net finance cost and depreciation and amortization. EBITDA is a key metric used by management and our board of directors to assess our financial performance. We calculate Segment EBITDA as segment profit before tax plus net finance cost and depreciation and amortization. We calculate Adjusted EBITDA as profit for the period plus income tax expense, net finance cost, depreciation and amortization, pre-operating expenses for projects under construction, business development expenses for expansion into new markets, change in fair value of assets held for sale and loss on sale of investments in associates.

We present EBITDA, Segment EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, management and our board of directors use EBITDA, Segment EBITDA and Adjusted EBITDA to assess our financial performance and believe they are helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding the growth of our business.

EBITDA, Segment EBITDA and Adjusted EBITDA are not measures of operating performance under IFRS and have limitations as analytical tools. You should not consider such measures either in isolation or as substitutes for analyzing our results as reported under IFRS. Additionally, our calculations of Segment EBITDA and Adjusted EBITDA may be different from the calculations used by other companies for similarly titled measures, including our competitors, and therefore may not be comparable to those of other companies. For reconciliations of EBITDA and Adjusted EBITDA to profit for the period and Segment EBITDA to segment profit before tax for the period, in each case, the most directly comparable IFRS measure, see “Summary Financial and Other Information—Key Performance Indicators.”

 

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We also show EBITDA of Grupo Las Américas for the period from January 1, 2018 to December 26, 2018, the period prior to our acquisition of Grupo Las Américas. We calculate EBITDA for Grupo Las Américas as net earnings from ordinary activities plus taxes, net financial expense (which consists of financial income and financial expense and which together are the same as net finance cost in Auna’s Segment EBITDA calculations), depreciation and amortization. Grupo Las Américas’ EBITDA is not a measure of operating performance under IFRS and has limitations as an analytical tool. You should not consider such measure either in isolation or as a substitute for analyzing Grupo Las Américas’ results as reported under IFRS. See “Summary Financial and Other Information—Key Performance Indicators” for a reconciliation of EBITDA of Grupo Las Américas to income before income taxes.

Medical Loss Ratio

We use medical loss ratio, or MLR, in this prospectus. MLR is calculated as (i) claims for medical treatment generated by our prepaid oncology plans plus (ii) technical reserves relating to plan members treated pursuant to such plans, whether at our facilities or third-party facilities, divided by revenue generated by our prepaid oncology plans. We believe that MLR is an important measure of our operating performance in our healthcare coverage business as it is an indicator of the percentage of payments under our oncology plans that is used for medical treatment as compared to administrative costs and is widely used in the healthcare industry as a measure of operating efficiency.

Market Information

We make estimates in this prospectus regarding our competitive position and market share, as well as the market size and expected growth of the healthcare industries in Peru and Colombia. We have made these estimates on the basis of our management’s knowledge and statistics and other information from the following sources: EsSalud, the Peruvian Superintendencia Nacional de Salud (“SUSALUD”), the Peruvian Ministry of Health (“MINSA”), the Colombian Superintendencia Nacional de Salud (“SUPERSALUD”), the Colombian Ministry of Health and Social Protection (“MinSalud”), the World Health Organization (“WHO”), the SBS, Fitch Solutions, Emerging Markets Information System (“EMIS”) and the Economist Intelligence Unit (“EIU”), among others. We believe such sources are the most recently available as of the date of this prospectus, from government agencies, industry professional organizations, industry publications and other sources. We believe these estimates to be accurate as of the date of this prospectus.

Offering Information

All amounts contained in this prospectus that have been adjusted to reflect the estimated net proceeds of the offering are based upon the sale of ADSs at an assumed public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus). Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the underwriters’ option to purchase up to             additional ADSs, representing                class A shares.

 

iv

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from the forward-looking statements that we make.

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “project,” “plan,” “believe,” “potential,” “continue,” “is/are likely to,” or other similar expressions. Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including, among others:

 

•

our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate;

 

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our ability to estimate and control healthcare costs, or if we cannot increase our prices to offset cost increases or expenditure increases, at our hospitals and clinics and with respect to our oncology plans;

 

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the negative impact of the COVID-19 pandemic on our business;

 

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our relationships with third-party payers;

 

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competition in a fragmented market like Peru and in Colombia;

 

•

our ability to recruit and retain quality medical professionals;

 

•

acquisitions, partnerships or joint ventures that we make or enter into;

 

•

our ability to integrate our acquired facilities or obtain the expected benefits from such acquisitions;

 

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our operation of Torre Trecca, and any additional public-private partnerships we may enter in the future;

 

•

our ability to execute our organic growth plan, which includes the construction of additional hospitals and clinics as well as expansion of our existing facilities;

 

•

our ability to continue growing our business at historical rates;

 

•

our ability to provide high-quality, advanced care for a broad array of medical needs to maintain and expand our markets;

 

•

our ability to develop and commercialize new products and services under Oncosalud;

 

•

our reliance on a limited number of suppliers of medical equipment, medicines and other supplies needed to provide our medical services;

 

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our compliance with extensive legislation and regulations in Peru and Colombia;

 

•

our ability to obtain registrations, authorizations, licenses and permits for the establishment and operation of our hospitals and clinics;

 

•

our exposure to liabilities from claims brought against our healthcare professionals or our facilities;

 

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our exposure to litigation and other legal, labor, administrative and regulatory proceedings to which we are subject;

 

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insufficiency of our insurance policies to cover potential losses;

 

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our compliance with privacy laws to which we are subject;

 

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a failure of our IT systems;

 

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our ability to maintain sufficient funds to settle current liabilities;

 

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any loss of members of our senior management team;

 

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our ability to maintain favorable labor relations with our employees;

 

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our reliance, as a holding company, on our subsidiaries to conduct all of our operations, and the ability of our subsidiaries to pay dividends and make other distributions to us which could adversely affect our ability to pay dividends;

 

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changes to IFRS accounting standards;

 

•

economic, social and political developments in Peru, including political instability, inflation and unemployment;

 

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economic, social and political developments in Colombia, including political and economic instability, violence, inflation and unemployment;

 

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adverse climate conditions and other natural disasters;

 

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the concentration of our operations in Lima and Medellín;

 

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corruption and ongoing high-profile corruption investigations in Peru and Colombia which could have an adverse effect on the Peruvian and Colombian economies;

 

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political and economic conditions in Venezuela which could have an adverse impact on the Peruvian and Colombian economies;

 

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developments and the perception of risk in other countries, especially emerging market countries;

 

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increased inflation in Peru or Colombia which could have an adverse effect on the Peruvian and Colombian economies;

 

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variations in foreign exchange rates;

 

•

changes in tax laws in Peru or Colombia which may increase our tax liabilities; and

 

•

other factors identified or discussed under “Risk Factors.”

The forward-looking statements in this prospectus represent our expectations and forecasts as of the date of this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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RISK FACTORS

Investing in our ADSs involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in the ADSs, you should carefully consider the risks and uncertainties described below in addition to the other information contained in this prospectus. In general, investing in the securities of issuers in emerging market countries, such as Peru, involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. Any of the following risks, alone or together with risks and uncertainties that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations or prospects. As a result, the trading price of the ADSs could decline, and you could lose some or all of your investment. When determining whether to invest, you should consider all of the information in this prospectus, including our financial statements and the notes thereto. Further, the risk factors below include cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Forward-Looking Statements.”

Risks Related to Our Business

We depend substantially on our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate, and any negative impact on those brands could have a material adverse effect on us.

We operate our business through several brands. Our principal brands are Auna, our primary brand, as well as Oncosalud, Clínica Delgado and Clínica Las Américas, all of which we believe are viewed positively and associated with high-quality healthcare services in the markets in which we operate. Our brands’ reputation is fundamental to driving demand for our healthcare services and prepaid plans and to our ability to attract and retain qualified medical personnel to work at our facilities. In addition, our brands’ reputation is key to our ability to negotiate favorable contracts with third parties, such as insurance providers and medical suppliers. Our ability to maintain our reputation is contingent on offering high-quality and efficient healthcare services. Accordingly, if we are unable to offer high-quality healthcare services and/or maintain our brands’ reputation among our plan members, patients and medical professionals, our business, financial condition and results of operations may be adversely affected.

In addition, there has been a marked increase in the use of social media platforms and other forms of internet-based communications that provide individuals and businesses with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms, including reviews, is virtually immediate, as is its impact. Many social media platforms allow the publishing of the content posted by their subscribers and participants, often without filters or checks on the accuracy of such content. If we receive negative reviews on social media or other negative publicity, even if such reviews are inaccurate, our brands’ reputation could suffer, affecting demand for our healthcare services, or we may have more difficulty attracting and retaining qualified medical personnel to work at our facilities, any of which could affect our ability to offer high-quality healthcare services and could have a material adverse effect on our business, results of operations and financial condition.

Our operating results may be adversely affected if we are not able to estimate and control healthcare costs, or if we cannot increase our prices to offset cost or expenditure increases, at our hospitals and clinics and with respect to our oncology plans.

Our operating results depend in large part on our ability to estimate and control the future costs involved in providing healthcare services at our hospitals and clinics. According to data published by the Instituto Nacional de Estadística e Informática (“INEI”) in Peru and the Departamento Administrativo Nacional de Estadística in Colombia, healthcare costs increased in Peru and Colombia by 2.2% and 2.8%, respectively, during 2019.

 

26

The main factors affecting healthcare costs and expenditures, and our ability to offset increases in those include:

 

•

increased cost of medical supplies, including pharmaceuticals, whether due to demand, inflation or otherwise;

 

•

the cost of acquiring new equipment and technologies, or upgrading existing equipment and technologies, needed to provide our services;

 

•

annual renegotiations of contracts with insurance providers and their ability to pay for our healthcare services; and

 

•

periodic renegotiations of contracts with doctors and medical support personnel as well as other medical services providers and suppliers.

Many of these factors are outside of our control. In addition, certain aspects of our growth strategy may also result in increased operating expenditures, such as opening new facilities or hiring additional personnel, which may not be offset by an increase in our revenue, resulting in diminished operating margins.

In addition, with respect to our oncology plans, differences between predicted and actual healthcare costs as a percentage of revenues attributable to our oncology plans can result in significant changes in our results of operations. Costs at our oncology business vary by the number of patients that are diagnosed in any given period as well as the stage of diagnosis (i.e., Stage I versus Stage IV) and type of cancer diagnosed. Later-stage diagnoses typically involve more costly treatment regimens, and certain types of cancer may be more likely to require newer, more expensive treatment options, which may also impact our costs. We adjust our plan pricing on an annual basis to reflect current cost projections and this adjusted pricing is automatically applied to any plans that are automatically renewed for another year. However, because our oncology plans are prepaid for one-year terms, any increase in costs in excess of our cost projections within a given period cannot be recovered in that plan period by increasing pricing.

If any of the above events occur and we are unable to rapidly adapt in proportion to the increase in costs for the provision of healthcare services, our business, financial condition and results of operations may be adversely affected.

Our business has been and continues to be negatively impacted by the COVID-19 pandemic.

Since December 2019, a novel strain of coronavirus (COVID-19) has spread around the world, including in Peru and Colombia. The Peruvian government closed its international borders and ordered a national lockdown on March 16, 2020 that lasted until June 30, 2020. In connection with the lockdown, all non-essential businesses were ordered to close. On July 1, 2020, the national lockdown was lifted and non-essential businesses gradually reopened; however, as a result of a subsequent increase in COVID-19 cases, lockdowns were ordered in certain cities, including Arequipa, in which we have facilities. Furthermore, as of the date of this prospectus, Peru’s borders remain closed indefinitely and Peru continues to be one of the countries with the highest mortality rates from COVID-19. Similarly, the Colombian government closed its borders and ordered a national lockdown on March 25, 2020 until August 31, 2020. However, at the end of August 2020, it announced a selective quarantine phase from September 1, 2020 until at least September 30, 2020. The lockdowns in Peru and Colombia effectively restricted nearly all economic activity in both countries, significantly impacting both the financial and operating performance of our business.

Our hospitals in Peru and Colombia are essential businesses and remain open for limited services. As a result of the pandemic, we were ordered to cancel all elective, non-emergency procedures and outpatient consultations in Peru and Colombia, restricting our services to emergency care only for the duration of the lockdowns. As a result, revenue from our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 15.3% and 19.6%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. We

 

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have also seen a significant increase in the cost of sales and services in recent months due to an increase in the purchase of gloves, masks and other personal protective equipment for all medical and administrative personnel who are in direct patient contact. At the same time, we have seen an increase in the prices of personal protective equipment, which has been in short supply around the world. In addition, we have experienced staffing shortages at our hospitals and clinics as medical personnel, working on the front lines, have contracted COVID-19 at high rates. We have covered these shortages by hiring temporary personnel and granting special bonuses to medical personnel caring for patients with COVID-19, which has increased our labor-related costs. As a result of increased costs, gross profit in our Healthcare Services in Peru and Healthcare Services in Colombia segments decreased 58.5% and 35.9%, respectively, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

In addition, in June 2020, the Peruvian government reached an agreement with certain private clinics, including Clínica Bellavista, Clínica Miraflores and Clínica Vallesur, whereby private clinics agreed to treat uninsured patients for COVID-19 for a flat fee, regardless of length of stay. Pursuant to the agreement, private clinics are being reimbursed by SIS and EsSalud. Although this has not caused a material impact on our results of operations as of the date of this prospectus, there can be no guarantee that the Peruvian government will not fail to reimburse us for such services or pressure private clinics, including our clinic, to provide services to uninsured patients on less favorable terms if the pandemic continues.

Moreover, the healthcare systems in several countries, including Peru and Colombia, have been overwhelmed with hospitals lacking the supply and personnel to treat the influx of COVID-19 patients and there have been several reports in the media containing misinformation about COVID-19 testing and COVID-19 treatment. As a result, we have seen public trust in healthcare facilities decline more broadly. Although such conditions have not been present in our facilities as of the date of this prospectus, if such conditions occur in our facilities and we have difficulty treating the influx of patients, we may face claims for damages and experience reputational damage and loss of public trust in the quality of our healthcare services.

The COVID-19 pandemic has also led to disruption of regional and global economic activity, and to volatility and a downturn in the financial markets, which is expected to continue at least in the near term. In our Oncosalud segment, we have seen a decline in sales of our prepaid oncology plans as much of our sales force is working from home and certain of our other sales channels are shut down completely as of the date of this prospectus. The disruption has also led to a significant increase in unemployment and as a result, we have seen an increase in the number of plan members cancelling their plans, which led to a 1.3% decrease in our number of plan members from 900,429 in June 2019 to 888,708 in June 2020. Plan members cancelling plans were primarily younger members who are at less risk of developing cancer. Because plan prices increase by age, this demographic trend had a positive impact on our segment revenue during the first half of the year and acted as an offset to other declines. We cannot predict whether the changes in the demographics of our plan members and Peruvian government policies in response to COVID-19 will continue to have a similar offsetting impact going forward. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19” for more detail.

To date, we have taken certain measures in the second and third quarters of 2020 to bolster our capital position as a result of the economic uncertainty. For example, four of our subsidiaries, Medic Ser S.A.C. (“Medic Ser”), Oncocenter Perú S.A.C. (“Oncocenter”), Oncosalud S.A.C. and GSP Servicios Generales S.A.C. (“GSP Servicios Generales”), each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. In addition, our subsidiaries Grupo Las Américas and Instituto de Cancerologia S.A.S. applied for and received loans of COP12,837.0 million and COP4,069.0 million, respectively, under a loan relief program offered by the Colombian government in response to the COVID-19 pandemic. The loans our Peruvian subsidiaries received contain certain restrictions on their ability to pay dividends. See “Risk Factors—Risks Related to Our Business—We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.”

 

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While we continue to pursue our capital expenditure projects, certain of our ongoing construction projects have been paused until economic activity fully resumes in the applicable region. In addition, we have shifted some of our capital expenditure budget to purchase additional resources to adequately address the pandemic, such as additional ventilators and temporary isolation units. Although we expect to be in a position to resume our construction projects in the near future, our cost of capital may increase, which could in turn negatively affect our ability to fund these projects in the future.

The extent to which the COVID-19 pandemic impacts our business, results of operations, liquidity and financial condition will depend on the duration and severity of the pandemic and the level of continued disruption to regional and global economic activity, which are impossible to predict at this time. Future developments with respect to COVID-19 are highly uncertain and new information may emerge concerning the severity of the COVID-19 pandemic and the actions necessary to mitigate or contain its impact. While such actions may be relaxed or rolled back if and when COVID-19 abates, the actions may be reinstated as the pandemic continues to evolve. The scope and timing of any such reinstatements is difficult to predict and may continue to materially affect our financial and operating performance in the future.

Any future pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our business.

The operation of a hospital involves the treatment of patients with a variety of infectious diseases. Previously healthy or uninfected people may contract serious communicable diseases in connection with their stay or visit at hospitals. In addition, these germs or infections could also infect employees and thus significantly reduce the treatment and care capacity at the medical facilities involved in the short-, medium- and long-term.

Any future pandemic, epidemic, outbreak of a contagious disease or other public health crisis could similarly disrupt our operations, diminish the public trust in our healthcare services, especially if we fail to accurately or timely diagnose any future contagious diseases and adversely affect our business, financial condition and results of operations. In addition, the introduction of new laws and regulations, or changes to existing ones, as a response to COVID-19 or a future pandemic, epidemic or public health crisis is difficult to predict and could materially affect our business. Our facilities could also be affected by the withdrawal of licenses, permits or authorizations as a result of a pandemic, epidemic or outbreak. Although we have disaster plans in place and operate pursuant to infectious disease protocols, the potential impact of a pandemic, epidemic or outbreak of a contagious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses or otherwise fail to maintain an effective system of internal controls, we may not be able to prevent or detect a material misstatement of our financial statements, and may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the price of our ADSs.

We have identified material weaknesses in our internal control over financial reporting. A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

As an emerging growth company, we currently are not required to comply with the Sarbanes-Oxley Act. As a result, neither our management nor an independent registered public accounting firm has performed an

 

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evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. The report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 will not be required until our annual report on Form 20-F following the date on which we cease to qualify as an “emerging growth company,” which may be up to five full fiscal years following the date of this offering.

The material weaknesses identified in our internal controls relate to (i) the adequacy of our information technology (“IT”) security management, including segregation of duties and access and privileged users, (ii) the comprehensiveness of our accounting policies and procedures manuals and (iii) the formalization of controls in key areas of the accounting process, including relating to the documentation and implementation of IFRS reporting requirements. If these weaknesses are not remediated, they could result in material misstatements in our annual or interim financial statements.

We have taken steps to remediate the aforementioned weaknesses, including: (i) designating a working group to develop a remediation plan focused on the internal control of the areas related to the material weaknesses, (ii) hiring financial reporting and internal control professionals with IFRS and PCAOB experience and (iii) conducting trainings for our personnel with respect to IFRS and PCAOB requirements. These remediation steps will be monitored by the audit and risk committee and senior management.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to these material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses.

Our revenues and results of operations are affected by our relationships with third-party payers, and any change to, or deterioration in, these relationships could have a material adverse effect on us, such as, for example, due to limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services as a result of changes in the SGSSS in recent years.

During the first six months of 2020, in our healthcare services business in Peru and Colombia, 79% of payments came from third-party insurance providers, including the Peruvian and Colombian governments, and 21% were paid out-of-pocket by our patients. In Peru, our accounts receivable are typically collected in an average of 80 days whereas in Colombia, these are typically collected in 150 days. An increase in this timing can significantly impact our ability to convert recognized revenue into payments, lengthening our cash conversion cycle. In addition, certain of our principal third-party payers also run their own hospital networks and therefore compete with us. See “—We face competition in a fragmented market like Peru and Colombia, from our current competitors and from future competitors that might enter the sector.”

In Peru, a facility must be included on an insurance provider’s approved list of healthcare facilities for an individual to be reimbursed for the services they receive at that facility. We negotiate with private insurance providers to ensure that we are on their list of approved facilities and to agree on the prices at which we are reimbursed for services provided to their plan members. As a large hospital network with one of the premier hospitals in Lima and leading hospitals in several other key cities, we have historically been able to renegotiate contracts at favorable rates with insurance providers on an annual basis. However, we expect continued third-party efforts to aggressively manage reimbursement levels and control costs. Moreover, our negotiating position could decline in the future if our brands’ reputation suffers. See “—We depend substantially on our brands’ reputation among our plan members, patients, the medical community and our suppliers in the regions in which we operate.”

In Colombia, approximately 95% of the population receives healthcare insurance through the government’s social security system, the SGSSS. Funds contributed to the SGSSS are administered by a government trust and

 

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distributed to private healthcare coverage providers, or EPSs. Changes in the SGSSS in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services. Moreover, payments from SGSSS funds are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and funding restrictions, all of which could materially increase or decrease program payments, as well as negatively affect the cost of providing service to patients and the timing of payments to facilities. We are unable to predict the effect of recent and future policy changes on our operations, and any such changes could have a material adverse effect on us.

In addition, like in Peru, EPSs in Colombia provide plan members with an approved list of facilities and plan members can choose which of those facilities to go to, although under certain circumstances, a plan member can challenge that decision and request to go elsewhere in the EPS’ network. If we do not maintain our reputation among EPSs and/or patients as one of the leading healthcare providers in Medellín and Barranquilla, EPSs may choose to send their plan members to, or patients may choose to go to, other facilities, which could have a material adverse effect on our business, financial condition and results of operations.

We face competition in a fragmented market like Peru and in Colombia, from our current competitors and other competitors that might enter the sector.

The healthcare industry in Peru and Colombia is competitive. In Peru, we face competition from other privately-operated hospitals, clinics and healthcare networks for the provision of healthcare services, many of which are operated by our principal third-party payers. While our Auna Peru network is currently one of the few private healthcare networks in the country with broad geographic reach, and the market is generally fragmented, it is possible that healthcare services providers operating other private hospitals and clinics will consolidate and further integrate their operations across facilities, which could cause us to lose market share. For example, Rímac Seguros y Reaseguros S.A. (“Rímac”) and El Pacífico-Peruano Suiza Compañia de Seguros y Reaseguros S.A. (“Pacífico”), two of the main insurance providers in Peru that are also significant third-party payers for Auna services, own and operate their own hospital networks that compete with us. Moreover, our flagship hospital, Clínica Delgado, faces competition from other high-complexity hospitals and clinics in Lima, such as Clínica Ricardo Palma, Clínica San Pablo and Clínica Sanna San Borja, which is operated by Pacífico. If demand for Clínica Delgado’s services decline, demand for services at our network overall may decline and/or our negotiating position with insurance providers and other third parties could suffer, any of which could have a material adverse effect on our business, financial condition and results of operations.

Currently, the quality of public sector medical services in Peru, principally provided by EsSalud and Seguro Integral de Salud (“SIS”), is widely considered deficient and over capacity, with long scheduling times, short appointments with doctors and a shortage of facilities, and we do not currently face substantial competition from government providers in Peru. We may face competition from government providers in the future if the Peruvian government allocates additional financial resources to EsSalud and/or SIS and/or they are able to improve their infrastructure and increase their capacity and the quality of care they provide.

At Oncosalud, our vertically integrated oncology plan provider, we also face competition from companies that offer healthcare plans covering oncology services, including traditional insurance providers and other companies offering prepaid plans. While we offer specialized and vertically integrated services that we believe provide us with a competitive advantage, our competitors may enhance the quality of their offerings in the future. Our competitors Rímac and Pacífico are the two main insurance providers in Peru, both of which have substantial financial resources. If any of our competitors, including Rímac and Pacífico, is able to offer more comprehensive or less expensive oncology services, we may lose market share in Peru, which could have a material adverse effect on our business, financial condition and results of operations.

Unlike in Peru where the market is more fragmented, there are several existing large hospital systems in Colombia and the gap between the quality of services provided by state-owned facilities and privately-owned facilities is much smaller. As a result, our Auna Colombia network faces competition in Colombia from both

 

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public and private healthcare services providers. Moreover, although healthcare coverage providers in Colombia typically dictate which facility a patient can go to for services, patients can, and frequently do, challenge these decisions, which fosters competition among healthcare providers in the market.

In Medellín, where a majority of our Colombian operations are currently located, we face competition from other hospital networks with premium facilities, including San Vicente de Paul, Pablo Tobón Uribe and El Rosario. In Barranquilla, where Clínica Portoazul is located, we also face competition from other hospital networks, including Clínica Iberoamericana (Grupo Keralty/Sanitas), Clínica del Caribe, Organización Clínica General del Norte y Bonnadona. Certain of our competitors may have greater financial resources, be better equipped and offer a broader range of healthcare services than we do. If we are unable to maintain or grow our competitive position in Colombia, our business, financial condition and results of operations may be adversely affected.

Our performance depends on our ability to recruit and retain quality medical professionals, and we face a great deal of competition for these professionals, which may increase our labor costs and negatively impact our results of operations.

We believe we have a unique, patient-centric culture that is important to our mission of transforming healthcare in the countries in which we operate. The success and competitive advantage of our hospitals and clinics depends in large part on the number, quality and experience of the physicians and other medical professionals at our facilities, as well as their ability to fit into our culture and our ability to maintain good relations with those professionals. The majority of our physicians in Peru and Colombia are hired on a fee-for-service basis. As a result, and because these arrangements are non-exclusive, there is significant competition between us and our competitors to ensure that the best qualified and most renowned physicians are treating patients at our hospitals. If we are unable to provide high-quality treatment for our patients, ethical and professional standards, adequate support personnel, technologically advanced equipment and facilities and research opportunities that meet their professional needs and goals, our physicians may choose to practice at other facilities. We may not be able to compete with other healthcare providers on some or all of these factors.

Physicians may also refuse to enter into new contracts with us, demand higher payments or perform treatments or procedures that result in higher medical expenses without generating corresponding revenue. In addition, a small number of physicians within each of our facilities generate a disproportionate share of our inpatient revenues and admissions, in particular physicians specializing in oncology, cardiology, trauma, neurology and general surgery. The loss of one or more of these physicians, even if temporary, could reduce patient demand for our services and cause a material reduction in our revenues. In addition, it could take significant time to find a replacement for any of our top physicians given the difficulty and cost associated with recruiting and retaining physicians, which may in turn adversely affect our ability to recruit and retain other doctors.

Our medical support staff, in particular our nurses, are also critical to our success and competitive advantage. Our medical support staff is on the front lines of a patient’s experience at our hospitals and clinics, and we depend on their efforts, abilities, and experience to maintain our reputation as a high-quality provider of healthcare services. In recruiting and retaining qualified hospital management, nurses and other medical personnel, such as pharmacists and lab technicians, we compete with other healthcare providers, including government hospitals.

Historically, there has been a shortage of qualified nurses and other medical support personnel in Peru and Colombia, which has been a significant operating issue for us and other healthcare providers. This shortage may require us to enhance wages and benefits to recruit, train and retain nurses and other medical support personnel or require us to hire expensive temporary personnel. Moreover, our failure to recruit and retain enough qualified nurses and other medical support personnel could result in loss of customer goodwill and a negative impact on our reputation.

 

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We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to raise the rates we charge for our services correspondingly. Our failure to either recruit and retain qualified hospital management, nurses and other medical support personnel or control our labor costs could harm our business, financial condition and results of operations.

Any acquisitions, partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition.

Acquisitions, partnerships and joint ventures are an integral part of our inorganic growth strategy. We evaluate, and expect in the future to evaluate, potential strategic acquisitions of, and partnerships or joint ventures with, other hospital networks and complementary businesses. However, we may not be successful in identifying acquisition, partnership and joint venture targets or we may use estimates and judgments to evaluate the operations and future revenues of a target that turn out to be inaccurate.

In addition, we may not be able to successfully finance or integrate any hospitals or other businesses that we acquire or with which we form a partnership or joint venture, and we may not achieve the anticipated benefits of such project. Furthermore, the integration of any acquisition, partnership or joint venture may divert management’s time and resources from our core business and disrupt our operations. As a result of any of the foregoing, we may spend valuable management time and money on projects that do not increase our number of patients or revenue. Acquisitions also involve special risks, including the potential assumption of unanticipated liabilities and contingencies. Even if such liabilities are assumed by the sellers, we may have difficulties enforcing our rights, contractual or otherwise. Moreover, our competitors may be willing or able to pay more than us for acquisitions, which may cause us to lose certain acquisitions that we would otherwise desire to complete. We cannot ensure that any acquisition, partnership or joint venture we make will not have a material adverse effect on our business, financial condition and results of operations.

In addition, the acquisition of a healthcare provider may require approval of the relevant antitrust regulator, such as the Superintendencia de Industria y Comercio (the “SIC”) in Colombia. In Peru, entities administering public health insurance funds (Instituciones Administradoras de Fondos de Aseguramiento en Salud Públicas or “IAFASs”), such as Oncosalud, must provide written notice to SUSALUD of any transfer of shares within 10 business days from such transfer. In addition, newly enacted legislation in Peru expected to become effective in March 2021 establishes a merger control regime that will require us to comply with antitrust clearance for certain acquisitions. If the relevant regulator delays or withholds its approval for acquisitions in Peru, Colombia or elsewhere, we may not be able to implement our business strategy on a timely basis or grow our operations in the timeframe that we expect, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully integrate our acquired facilities or obtain the expected benefits from such acquisitions.

Our strategic growth plan, particularly in Colombia, depends on the acquisition and integration of existing medical care facilities into our network. We may not be able to successfully and efficiently integrate the operations of the facilities we acquire, including their personnel, financial systems, distribution or operating procedures. In 2018, we completed the acquisition of Grupo Las Américas in Medellín, Colombia and in 2020, we completed the acquisition of Clínica Portoazul in Barranquilla, Colombia. The integration process for both acquisitions is ongoing. We may also be unable to retain physicians and other medical support staff, in particular if the acquired facilities are in other countries with different cultures, and our relationship with current and new professionals, including physicians, may be impaired. If we are not able to manage our expanded operations and the corresponding integrations effectively, our business, financial condition and results of operations could be materially adversely affected.

 

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Our operation of Torre Trecca, and any additional public-private partnerships we may enter in the future, may subject us to additional risks and uncertainties.

In 2010, we entered into an agreement for our first PPP with EsSalud to rebuild Torre Trecca, an outpatient facility (which is currently not in use) providing healthcare services to patients covered through EsSalud, as a high-rise treatment center, and begin operating it on behalf of EsSalud. There are substantial risks and uncertainties associated with this agreement, and any additional PPPs that we may enter into in the future. For example, we signed our initial agreement with EsSalud in 2010, but have not been able to begin the partnership because approval of certain project milestones and amendments to the relevant concession agreement, which are necessary to make the project viable, remain pending with EsSalud and other government bodies. Once we receive approval of the applicable milestones, we expect it to take 18 to 24 months to rebuild and redevelop the Torre Trecca facility, which is currently not in use, and begin operations. If the relevant Peruvian governmental authorities delay or withhold their approval of the applicable project milestones and amendments to the concession agreement required to start operation of the Torre Trecca PPP, the concession agreement may be terminated. Even if we receive approval to begin operating the PPP, we have not previously operated a PPP, and we may underestimate the level of resources or expertise necessary to make the Torre Trecca partnership, or any future PPPs, successful or to otherwise realize expected benefits. Moreover, given the nature of PPPs, we expect this business, as well as any future PPPs, to generate lower margins than our current business segments have historically generated. In addition, the quality of medical services provided by EsSalud is widely considered deficient and over capacity, and our association with EsSalud and any complaints of the quality of government health services may adversely affect our reputation. We may face similar reputational risks with other PPPs in the future. Our failure to successfully manage these risks could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our organic growth plan includes the construction of additional hospitals and clinics as well as expansion of our existing facilities.

Our organic growth plan includes building additional hospitals and clinics, in particular in Peru. We are identifying suitable locations in Peru and Colombia for future facilities by considering a number of factors, including regional market size, existing competition and potential strategic partners. There are uncertainties regarding how successfully we can identify the suitable market and obtain required government approvals in a timely manner. We are currently constructing hospitals in Piura and Chiclayo as well as Clínica del Sur in Colombia. In addition, we consider the expansion of our existing facilities to be an important part of our organic growth plan and we are currently working on expanding Clínica Delgado and Clínica Vallesur in Arequipa, Peru.

While we believe our Auna Model provides an effective framework for building and expanding our facilities, our current and future construction projects are and will be subject to a number of risks, including:

 

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engineering problems, including defective plans and specifications;

 

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delays in obtaining or inability to obtain necessary permits, licenses and approvals;

 

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disputes with, defaults by, or delays caused by contractors and subcontractors and other counterparties;

 

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environmental, health and safety issues, including site accidents and the spread of viruses;

 

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fires, earthquakes, adverse weather events and other natural disasters;

 

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geological, construction, excavation, regulatory and equipment problems; and

 

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other unanticipated circumstances or cost increases.

The occurrence of any of these developments or construction risks could increase the total costs, delay or prevent the construction or opening or otherwise affect the design and features of any existing or future construction projects that we might undertake.

 

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Furthermore, planning, designing and constructing new facilities is time-consuming and complex. In addition to diverting management’s time and resources from our core business, there are typically several years of significant capital expenditures before a facility becomes operational and generates income. If we cannot successfully implement our organic growth strategy and convert new and expanded facilities to profitability on a timely basis, our business, financial condition and results of operations may be adversely affected.

We may not be able to continue growing our business at historical rates.

Our revenue has experienced substantial growth since 2008 and our strategy is to continue to grow our operations, through organic and inorganic growth. However, we may not be able to continue to grow at a rate consistent with our recent performance or to continue growing at all in the future due to factors beyond our control. For example, we expect gross domestic product (“GDP”) growth to slow in Peru and Colombia in 2020 as compared to prior years, in particular as a result of the COVID-19 pandemic, which could affect healthcare spending in these countries. Our growth could also be impacted by changes in laws or regulations or delays in construction or acquisition of new facilities, any of which could make the execution of our strategic growth plan more difficult. In addition, as we grow our business, we will need to expand our internal controls and administrative and IT systems, among other functions, and hire additional personnel to continue effectively operating our business. The market for qualified personnel that are able to fill management and key operational roles is highly competitive in Peru and Colombia due to the limited number of professionals that have the requisite training and experience, and we may be unable to hire sufficient qualified personnel to support our growth. Demand for qualified personnel may also increase as a result of the COVID-19 pandemic. Any inability to adequately scale our operations to meet the increased size of our business may have a material adverse effect on our ability to continue growing our business and/or on our financial condition or results of operations.

If we are unable to provide high-quality, advanced care for a broad array of medical needs, demand for our healthcare services may decrease.

Demand for our healthcare services is driven in large part by our ability to offer high-quality, advanced care for a broad array of medical needs, which is in turn contingent on our having state-of-the-art medical equipment at our facilities, as well as our ability to access high-quality medicines. The technology used in medical equipment and related devices is constantly evolving and, as a result, manufacturers and distributors continue to offer new and upgraded products to healthcare providers. Moreover, new and improved medicines are constantly being introduced to the market. To compete effectively, and to attract doctors and recruit and retain medical staff, we must continually assess our equipment needs and invest in upgrades when significant technological advances occur in order to continue providing access to advanced treatment, and we must ensure that we have access to high-quality, cutting-edge medicines for any given treatment. Such technological equipment costs represent significant capital expenditures. If our facilities do not stay current with technological advances in the healthcare industry and/or we do not offer access to high-quality, cutting-edge medicines, patients may seek treatment from other providers or insurance providers may send their patients to alternate facilities, which could result in decreased demand for our services and have an adverse effect on our business, financial condition and results of operations.

If we fail to successfully develop and commercialize new products and services under Oncosalud, our operating results may be materially and adversely affected.

The future growth of our Oncosalud business depends on our ability to develop and introduce new products and services, including plans that are financially accessible to a larger segment of the population and plans that cover additional medical specialties. Our ability to successfully roll out new and innovative products and services depends on a number of factors, including significant investments in research and development, efficient management of resources and an effective sales effort. Our research and development efforts may not yield the benefits we expect to achieve in a timely manner, or at all. To the extent that we are unable to execute our strategy for Oncosalud of introducing new and innovative products, diversifying our product portfolio and

 

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satisfying consumers’ changing preferences, we may not be able to grow our plan member base and our results of operations may be adversely affected. Even if we are able to add new products and services under Oncosalud, these may not lead to our anticipated results, potentially reducing our return on investment.

We rely on a limited number of suppliers of medical equipment, medicines and other supplies needed to provide our medical services.

A substantial portion of the medical equipment, medicines and other supplies used in our hospitals and clinics is highly complex and produced by a limited number of suppliers. For example, we purchased 70% and 50% of our medicines and 44% and 16% of other medical supplies in Peru and Colombia, respectively, from our 10 largest suppliers in the first six months of 2020 via purchase orders, and whose commercial terms are renegotiated annually. In addition, in many instances, there are only a small number of suppliers that provide a particular type of medicine or other supplies, which increases their bargaining power. Any interruption in the supply of medical equipment, medicines or other supplies from these suppliers, including as a result of the failure by any of these suppliers to obtain required third-party consents and licenses for production or import/clearance, may compromise our ability to provide effective and adequate services in our hospitals and clinics, which could have a material adverse effect on our business and on the market value of the ADSs.

We are subject to extensive legislation and regulations in Peru and Colombia.

We are subject to extensive legislation and regulations in Peru and Colombia, including in relation to the provision of healthcare services and prepaid healthcare plans, environmental protection, health surveillance and workplace safety and management of waste by a variety of national, regional and local governmental authorities, and we are supervised by a number of governmental bodies and agencies. The regular functioning of hospitals and clinics depends, among other things, on obtaining and maintaining valid registrations, licenses, authorizations, grants and permits for installation and operations, including for the sale of medicines and the operation of medical equipment, as well as for the collection, deposit or storage of products; utilization of equipment; import of merchandise and biological materials; handling, treatment, transport and disposal of contaminant wastes, radioactive materials and controlled chemical products; and use of water resources (including installing wells to supply water and disposing of wastewater in accordance with applicable laws and regulations). Moreover, as a provider of prepaid healthcare plans in Peru, we are subject to various economic and financial related regulations, including minimum capital requirements, investment requirements and limitations on asset allocations and indebtedness, among others. We are subject to government inquires, inspections and auditors from time to time. For example, in August and September 2020, the Peruvian National Institute for the Defense of Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual) (“INDECOPI”) began inquiries in order to assess if private clinics, such as us, have been involved in horizontal collusion in connection with the prices of medicines and sanitary equipment. We are fully cooperating with these inquiries. We are unable to predict the effect of the conclusion of such inquiries on our operations, and if any such consequences of those inquiries could have a material effect on us. If we fail to comply with applicable laws and regulations, if such laws or regulations change in a manner adverse to us or if we cannot maintain, renew or secure required registrations, permits, licenses or other necessary regulatory approvals, we may be unable to operate our business, suffer administrative penalties, civil liability and criminal charges and fines, have our registration or operating license suspended or revoked, or incur additional liabilities from third-party claims, any of which may also have a negative impact on our brand and reputation. For example, in 2017, the competent environmental authority of Medellín’s Metropolitan Area (Área Metropolitana del Valle de Aburrá) (“AMVA”) alleged that Grupo Las Américas, along with other healthcare facilities, needed to comply with certain newly implemented requirements for processing and disposing wastewater. Grupo Las Américas has implemented the necessary procedures and we believe is currently in compliance with such requirements based on a third party report. If Grupo Las Américas or other facilities in our Auna Colombia network fail to comply with regulations related to the processing of wastewater in the future, AMVA may initiate administrative proceedings and ultimately, issue sanctions against us. See “Industry—Regulation of the Colombian Healthcare Sector—Environmental Regulations.” No assurance can be

 

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given that any investigations, proceedings or penalties will not occur and will not materially and adversely affect our businesses and results of operations and financial conditions with respect to our recently acquired businesses or any of our other businesses.

Furthermore, we contract with third parties to assist in the collection, treatment, transport and disposal of biohazardous materials. Any failure by these third parties to comply with applicable laws and regulations in the regions in which we operate could also subject us to significant administrative fines, civil liability or criminal charges.

We cannot ensure that the Peruvian and Colombian legislation and regulations applicable to our industry will not become more severe or subject us to greater costs in the future, or that the Peruvian and Colombian authorities or regulatory agencies will not adopt more restrictive or more rigorous interpretations of existing laws and regulations, including with respect to obtaining and renewing the licenses, permits and registrations, or the environmental, solvency, minimum capital, health surveillance and workplace safety laws and regulations to which we are subject. For instance, in December 2019, the Peruvian government began requiring that all pharmacies carry generic versions of medicines appearing on a list published by MINSA, which currently includes 34 medicines, with the goal of giving patients the option to purchase lower cost alternatives of common medicines at every pharmacy. In addition, around the same time, an emergency decree established that uninsured Peruvians will be able to access the SIS regardless of their socioeconomic classification. We are unable to predict the effect of recent and future policy changes on our operations, and any such changes could have a material adverse effect on us.

Moreover, we cannot ensure that the fees, charges and contributions owed to the competent authorities and to professional trade associations, such as El Colegio Médico del Perú and El Colegio Médico Colombiano, will not be increased as a result of new legislative or regulatory measures. Any one of these factors may involve the incurrence of unforeseen additional costs by us and/or capital expenditures, thereby adversely affecting our business and operating results.

We may be unable to obtain the registrations, authorizations, licenses and permits for the establishment and operation of our hospitals and clinics.

The establishment and operation of our hospitals and clinics depend on a number of registrations, authorizations, licenses and permits that we have to obtain and maintain in force from national, regional and local government agencies in both Peru and Colombia. Moreover, our hospitals are subject to the inspection of health surveillance agencies in the regions in which we operate, which may conduct periodic audits of our facilities to ensure compliance with applicable standards.

Furthermore, we may also need to obtain authorizations, licenses and permits to offer new types of healthcare services at our facilities, which may cause a delay in offering new services to our patients.

Any failure to obtain or renew required registrations, authorizations, licenses or permits may prevent us from opening and operating new hospitals and clinics or force us to close our hospitals and clinics currently in operation. We may also be subject to fines and other penalties and suffer damage to our reputation. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to liabilities from claims brought against our healthcare professionals or our facilities, including medical malpractice lawsuits.

We and our healthcare professionals are subject to medical malpractice lawsuits, product liability lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large claims, as well as significant defense costs and potential reputational damage. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. In an effort to resolve one or more of these

 

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matters, we may choose to negotiate a settlement, which may have negative implications. Amounts we pay to settle any of these matters may be material. All professional and general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience, our insurance coverage is adequate considering the claims arising from the operations of our hospitals, clinics and oncology plans. While we continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations are partially or fully exhausted in the future, or payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our business, financial condition and results of operations. See “—Our insurance policies may be insufficient to cover potential losses.”

We are subject to litigation and other legal, labor, administrative and regulatory proceedings.

We are regularly party to litigation and other legal proceedings relating to claims resulting from our operations in the normal course of business. These matters have included or could in the future include matters related to Oncosalud’s healthcare benefits coverage and other payment claims (including disputes with plan members, physicians, other healthcare professionals and members of its salesforce), tort claims (including claims related to the delivery of healthcare services, such as claims of medical malpractice by medical professionals employed by us or physicians with whom we have a contractual relationship), labor claims (including disputes with employees, former employees and independent contractors) and administrative and regulatory claims (including retroactive tax claims or challenges arising out of our failure or alleged failure to comply with applicable laws and regulations). In addition, we have certain ongoing lawsuits, which include claims against Grupo Las Américas, relating to events that took place prior to our acquisition of Grupo Las Américas. Pursuant to the share purchase agreement we entered into in connection with the acquisition, the sellers contributed an amount in cash to an escrow account to cover these claims. At this time, the amounts held in escrow cover what we believe is our potential exposure pursuant to these ongoing proceedings. However, if additional claims are asserted against us as a result of our acquisition of Grupo Las Américas and one or more of these claims results in an adverse decision against us, these amounts may not be sufficient to cover our exposure. In addition, the interpretation and enforcement of certain provisions of our existing or any future agreements (including those related to force majeure clauses in the context of pandemics) may result in disputes among us and our patients or third parties. Litigation and other legal proceedings are subject to inherent uncertainties, and unfavorable rulings may occur. We cannot assure you that the legal, labor, administrative and regulatory proceedings in which we are or may become involved will not materially and adversely affect our ability to conduct our business in the manner that we expect, or otherwise adversely affect our business, financial condition and results of operations. See “Business—Legal Proceedings.”

Our insurance policies may be insufficient to cover potential losses.

We maintain insurance coverage in accordance with normal market practice in order to cover losses arising in connection with our hospital networks and oncology plans. Certain risks are not covered by insurers in the market (such as war, acts of God and force majeure, the interruption of certain activities and human error, including in relation to medical errors). Furthermore, natural disasters, adverse meteorological conditions and other events may cause physical damage and loss of life, business interruption, equipment damage, pollution and environmental damage, among others. We cannot ensure that our insurance policies will be suitable and/or sufficient in all circumstances or against all risks. The occurrence of a significant loss for which we are not insured, in full or in part, may require us to expend significant amounts. Furthermore, we cannot assure you that we will be able to maintain insurance coverage at reasonable commercial rates or on acceptable terms, or to contract insurance policies with the same or similar insurance companies. Any of the aforementioned developments may adversely impact us, our business, financial condition and results of operations.

 

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We are subject to certain privacy laws and any failure to adhere to these requirements could expose us to civil and criminal penalties, and damage our reputation.

Our business operations and current and future arrangements with medical professionals, third-party payers, plan members and patients expose us to various laws and regulations protecting the privacy and security of health information and personal data, including personal data protection laws in Peru and Colombia. We have made significant investments in technology to adopt and utilize electronic health records and to become meaningful users of health IT, and as a result, we are in possession of a significant amount of protected health information and other data subject to these privacy laws. We may be required to expend significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws. If our operations are found to be in violation of any of these privacy laws or if we are found to have used private information incorrectly, we may be subject to administrative fines and penalties, civil liability and criminal charges and could result in harm to our reputation. See “Industry—Regulation of the Peruvian Healthcare Sector” and “Industry—Regulation of the Colombian Healthcare Sector.”

A failure of our IT systems could adversely impact our business.

We rely extensively on our IT systems to manage clinical and financial data, communicate with our patients, payers, suppliers and other third parties and summarize and analyze operating results. In addition, we are subject to various laws and regulations protecting the privacy and security of health information and personal data, including personal data protection laws. A failure of our IT systems may be caused by, among other things, defects in design or manufacture of hardware, software or applications we develop or procure from third parties, human error, cyber security incidents, damage from natural disasters, power loss, telecommunications failure, unauthorized entry or other events beyond our control. In certain circumstances we may rely on third-party vendors to process, store and transmit large amounts of data for our business whose operations are subject to similar risks. Our IT systems also depend on the timely maintenance, upgrade and replacement of networks, equipment and software, as well as preemptive expenses to mitigate the risks of failures.

Any failure of our IT systems could materially disrupt our business activities. For example, because we are reliant on our IT systems to manage clinical information and patient data, a material disruption of our IT systems could negatively impact our ability to treat our patients for the duration of the disruption and result in injury and loss of lives, which could subject us to significant litigation or other losses and have a material adverse impact on our reputation, business, financial condition and result of operations.

A failure of our IT systems could also expose us to various security threats and vulnerabilities that may result in the theft, destruction, loss or misappropriation of protected health information or other data subject to privacy laws in Peru or Colombia or loss of proprietary business information. Breaches of our security measures and the unauthorized dissemination of sensitive personal information, proprietary information or confidential information could expose us, our customers or other third parties to a risk of loss or misuse of this information, including exposing our customers to the risk of financial or medical identity theft, result in litigation and potential liability, such as regulatory penalties, for us, damage our brand and reputation or otherwise harm our business. The failure of our IT systems, including the costs to eliminate or address security threats and vulnerabilities before or after a system failure, could have a material adverse effect on our business, financial condition and results of operations.

We may not have sufficient funds to settle current liabilities and as a result we may continue to have negative working capital from time to time.

Our board of directors has the ultimate responsibility for liquidity risk management. It has established an appropriate framework allowing our management to handle financing requirements for the short-, medium- and long-term. As of June 30, 2020, we had working capital of S/(217.4) million (US$(61.3) million). Our management believes that our available cash and cash equivalents and cash flows expected to be generated from

 

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operations and borrowings available to us under our revolving credit lines, will be adequate to satisfy our capital expenditure and liquidity needs for the foreseeable future. However, we may require additional capital in the form of additional debt or equity to meet our long-term objectives relating to the expansion of our business. As a result, we may continue to have negative working capital from time to time. It may be difficult for us to obtain additional financing in the future, on acceptable terms or at all, given that all of our assets are currently collateralized. If we are unable to access the capital markets to finance our operations in the future, this could adversely affect our ability to obtain additional capital to grow our business and have an adverse effect on our business, financial condition and results of operations.

Any loss of members of our senior management team could have an adverse effect on us.

Our success depends in large part on performance of our senior management. If any members of our senior management leave the Company, we may not be able to replace them with equally qualified professionals. Competition for qualified personnel in the Peruvian and Colombian healthcare industries is strong given the limited number of professionals with appropriate training and/or proven experience in this area. Furthermore, we may be delayed or unsuccessful in hiring, training and integrating new members of our senior management. The loss of any member of our senior management and/or any difficulties encountered in replacing them may adversely affect our business and prospects. See also “—We may not be able to continue growing our business at historical rates.”

Our performance depends on favorable labor relations with our employees. Any deterioration in these relations or increased labor costs may adversely affect our business.

Our employees are not unionized and have not entered into collective bargaining agreements. However, nothing prevents them from doing so in the future. Conflicts with our employees and organized labor actions could result in increased legal and other associated costs and divert management attention. In addition, requirements to increase employee salaries and/or benefits as a result of future collective bargaining agreements, governmental regulations or policies or otherwise could cause us to suffer a material adverse effect on our financial condition and results of operations.

Any significant increase in labor costs, deterioration in relations with employees, or work stoppages at any of our hospital units, whether due to union activities, employee turnover, labor inspections or other factors, may adversely affect our operating results and financial condition.

We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.

As a holding company, all of our operations are conducted through our subsidiaries. Accordingly, our ability to pay dividends to you will depend upon our receipt of dividends and other distributions from our subsidiaries. There are various restrictions in Peru and Colombia that may limit our subsidiaries’ ability to pay dividends or make other payments to us, such as their obligations to maintain minimum regulatory capital, reserves and minimum liquidity. For example, both our Peruvian and Colombian subsidiaries must maintain mandatory legal reserves, and certain of our Peruvian subsidiaries must maintain minimum capital requirements in their capacity as providers of healthcare coverage plans and our Colombian subsidiaries must maintain certain capital allocations, in each case reducing their net income and the cash available to pay dividends to us. Moreover, our subsidiaries in countries other than Peru, such as our Colombian subsidiaries, may be subject to exchange controls in the future that prevent them from making distributions to us.

Furthermore, we have certain existing indebtedness, and may incur additional indebtedness or enter into other arrangements in the future, that contain terms that restrict or prohibit our subsidiaries from paying dividends, making other distributions and making loans to us. For example, four of our subsidiaries, Medic Ser,

 

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Oncocenter, Oncosalud S.A.C. and GSP Servicios Generales, each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. Such loans restrict these subsidiaries’ ability to pay dividends to us during the term of each loan, which may be up to 36 months. The restrictions on these subsidiaries’ ability to pay dividends to us have not to date had a material impact on our liquidity or our ability to pay dividends to our shareholders because several of our key operating subsidiaries remain able to pay dividends to us. However, we cannot assure you that we will not need to take out additional loans under these programs in the future, or that the agreements governing our existing or future indebtedness will permit them to provide us with sufficient dividends or distributions or permit us to loan money or enter into other similar arrangements to fund dividend payments.

To the extent our subsidiaries do not have funds available or are otherwise restricted from paying dividends to us, our ability to pay dividends to our shareholders will be adversely affected.

Our financial results may be impacted by changes to IFRS accounting standards.

We report our financial condition and results of operations in accordance with IFRS. Changes to IFRS may cause our future reported financial condition and results of operations to differ from current expectations, or historical results to differ from those previously reported due to the adoption of new accounting standards on a retrospective basis. We monitor potential accounting changes and, when possible, we determine their potential impact and disclose significant future changes in our financial statements that we expect as a result of those changes. For further information, see note 3 to our audited consolidated financial statements included elsewhere in this prospectus.

Risks Relating to Peru and Colombia

Economic, social and political developments in Peru, including political instability, inflation and unemployment, could have a material adverse effect on our businesses and our results of operations may be negatively affected by recent political instability in Peru.

We derived 73.9% of our revenues from operations in Peru in the first six months of 2020. As such, our results of operations are substantially dependent on the ability of patients in Peru to pay for services at our hospitals and clinics and our oncology plans. Our business, financial condition and results of operations could be affected by changes in economic and other policies of the Peruvian government (which has exercised and continues to exercise substantial influence over many aspects of the private sector) and by other economic and political developments in Peru, including devaluation, currency exchange controls, inflation, economic downturns, corruption scandals, social unrest and terrorism.

In the past, Peru has experienced political instability that has included a succession of regimes with differing economic policies and programs. Peru has been widely considered a stable democracy in recent years. However, on September 30, 2019, President Martin Vizcarra took executive action to dissolve the Peruvian Congress and called for a new election of congressional members. In response to the dissolution of the Congress, former members of the legislative body voted to suspend President Vizcarra for twelve months and appointed Vice President Mercedes Araoz as interim president to temporarily replace Mr. Vizcarra. Vice President Araoz resigned from her position as interim president the following day. On January 14, 2020, the Peruvian Constitutional Court ruled on the constitutional action questioning President Vizcarra’s closing of Congress, declaring the executive action to be constitutionally and legally valid, thus dismissing the former president of the legislative body’s claim of unconstitutionality. In addition, on January 26, 2020, congressional elections were held to form the new Congress. The new Congress is fragmented and will likely be replaced in the next general election in April 2021. Furthermore, President Vizcarra replaced over half of his Cabinet members on July 15, 2020 in response to his rapidly declining popularity due to the harsh economic impact of the COVID-19 pandemic on Peru and the lengthy lockdown imposed by the Peruvian government. On August 5, 2020, Congress

 

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rejected a vote of confidence for the newly appointed Cabinet chief forcing President Vizcarra to appoint a new Cabinet within 48 hours. On August 6, 2020, President Vizcarra appointed a new Cabinet, led by former Minister of Defense Walter Martos as Prime Minister and which includes most of the members of the former Cabinet. President Vizcarra has been known for continuing to pursue business-friendly and open-market economic policies. However, Congress has been discussing certain initiatives which may adversely impact the Peruvian economy should they be approved, such as authorizing the withdrawal of funds from pension funds and implementing a limit on interest rates that may be charged by financial institutions. In addition, Peru will hold a general election in April 2021 to elect a new President and Congress, which increases the uncertainty surrounding the Peruvian economy. In the past, governments have imposed controls on prices, exchange rates, local and foreign investment and international trade, restricted the ability of companies to dismiss employees, expropriated private sector assets and prohibited the remittance of profits to foreign investors. We cannot be certain whether the Peruvian government will continue to pursue business-friendly and open-market economic policies that stimulate economic growth and stability.

Until the recent political crisis, Peru has experienced a period of relative economic and political stability since the early 2000s. Peru’s GDP growth rates, low inflation, and external surplus reflect, in part, the strength of the fundamentals of Peru’s economy. However, a deterioration of the global economy, including as a result of the global coronavirus outbreak, or a sharp decrease in commodity prices may adversely affect Peru’s economy. In addition, an economic contraction or weak economic growth in Peru’s trading partners may have an adverse effect on Peru’s economy. Despite Peru’s ongoing economic growth and stabilization, the social and political tensions and high levels of poverty and unemployment continue. Future government policies to preempt or respond to social unrest could include, among other things, expropriation, nationalization, suspension of the enforcement of creditors’ rights and new taxation policies. There can be no assurance that Peru will not face political, economic or social problems in the future or that these problems will not adversely affect our business, financial condition and results of operations.

A deterioration of political stability as a result of the current political crisis or otherwise and any resulting effects on the Peruvian economy could affect our patients’ ability to afford our healthcare services, our ability to expand and grow consistently with our strategic plans or otherwise negatively affect our business, financial condition and results of operations.

Economic, social and political developments in Colombia, including political and economic instability, violence, inflation and unemployment, could have a material adverse effect on our businesses, financial condition and results of operations.

In the first six months of 2020, we derived 26.1% of our revenues from operations in Colombia. As such, our results of operations are substantially dependent on the ability of patients in Colombia to pay for services at our hospitals and clinics. Decreases in the economic growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, impact our financial condition and results of operations.

Colombia’s central government fiscal deficit and growing public debt could adversely affect the Colombian economy. The Colombian fiscal deficit was 2.5% of GDP in 2019, 3.1% of GDP in 2018 and 3.6% of GDP in 2017. According to projections published in August 2020 by the Ministry of Finance and Public Credit, the Colombian government expects a fiscal deficit of 8.2% of GDP for the year 2020. In the first six months of 2020, the Colombian economy has deteriorated as a result of the COVID-19 pandemic and the collapse in oil prices in April 2020. If the Colombian economy continues to deteriorate as a result of these or other factors, our business, results of operations and financial condition could be adversely affected. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and

 

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regulatory policy. In addition, Colombia held presidential elections in May 2018 with runoffs in June 2018. Iván Duque Márquez was elected president and took office in August 2018. In November 2019, a national protest movement erupted demanding that the Colombian government invest in social measures and turn away from fostering big business, among other demands. We cannot predict what policies will be adopted by the Colombian government and whether those policies would have a negative impact on the Colombian economy or our business and financial performance. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia.

Furthermore, Colombia has suffered from periods of widespread criminal violence over the past four decades, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia) (the “FARC”), paramilitary groups and drug cartels. In regions of the country with limited governmental presence, these groups have exerted influence over the local population and funded their activities by protecting and rendering services to drug traffickers. Despite efforts by the Colombian government, drug-related crime, guerrilla paramilitary activity and criminal bands subsists in Colombia, and allegations have surfaced regarding members of the Colombian Congress and other government officials having ties to guerilla and paramilitary groups. In November 2016, former President Juan Manuel Santos signed a peace deal with the FARC, and FARC guerillas began a process of disarming, which was completed in February 2017. Although the Colombian Congress has approved certain regulations to implement the peace deal, opposing members of Congress have expressed their intention to make amendments to the peace deal and regulations implementing the peace deal. In addition, in August 2019, the former second in command FARC leader, Iván Márquez, announced his return to arms. The former leader of the FARC criticized Márquez’s position and reiterated the FARC’s commitment to peace. It is unclear what effect the objections of members of Congress, or the subsequent announcement of rearmament, will have on the implementation of the peace deal. If the peace deal is only partially implemented, or not implemented at all, violence associated with the FARC may escalate. In addition, although the Colombian government and the National Liberation Army (“ELN”) were in talks since February 2017 to end a five-decade war, the Colombian government suspended the negotiations in January 2019 after a series of rebel attacks, including a car bombing at a police academy in Bogotá resulting in 21 people dead and many injured. The continuation or escalation in the violence associated with the FARC or the ELN may have a negative impact on the Colombian economy or on us, which may affect our patients, employees, assets and projects in the region, as well as our ability to acquire new assets, which could have a material adverse effect on our business, financial condition and results of operations.

Our operations could be adversely affected by adverse climate conditions and other natural disasters.

Peru and Colombia are affected by El Niño, an oceanic and atmospheric phenomenon that causes a warming of temperatures in the Pacific Ocean, resulting in heavy rains off the coast of Peru and Colombia and various other effects in other parts of the world. The effects of El Niño, which typically occurs every two to seven years, include flooding and the destruction of fish populations and agriculture, and it accordingly can have a negative impact on the Peruvian and Colombian economies. For example, in early 2017, El Niño adversely affected agricultural production, transportation services, tourism and commercial activity in Peru, caused widespread damage to infrastructure and displaced people and resulted in a 1.5% drop in GDP growth in 2017 relative to 2016 figures. The Peruvian government estimated that El Niño caused US$3.1 billion in damages in affected regions. Although El Niño did not have a material adverse effect on our business, we were forced to temporarily close certain facilities in the northern part of Peru.

Peru is also located in an area that experiences seismic activity and occasionally is affected by earthquakes. For example, on May 26, 2019, an earthquake of 8.0 magnitude struck a remote part of the Amazon in Peru, resulting in collapsed buildings, certain power failures and two reported deaths. This was the strongest earthquake in Peru since 2007, when an earthquake with a magnitude of 7.9 on the Richter scale struck the central coast of Peru, severely damaging the region south of Lima. Although none of our hospitals and clinics in Peru and Colombia have been materially affected by natural disaster to date, a major earthquake, volcanic

 

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eruption or other natural disaster caused by El Niño or otherwise could damage the infrastructure necessary to their operations.

Our insurance may not be adequate to cover the damages our infrastructure experiences and the occurrence of an earthquake in particular and any other natural disasters in general could adversely affect our business, results of operations and financial condition. See “—Our insurance policies may be insufficient to cover potential losses.”

In addition, natural disasters, accidents and other similar events, including power loss, may discontinue the normal operations of our hospitals. Any such event could adversely affect our ability to provide services to patients and result in loss of lives and injury. Any of these events and other factors beyond our control could have an adverse effect on the overall business sentiment and environment, our reputation and materially and adversely impact our business, financial conditions and results of operations.

Our operations are highly concentrated in Lima and Medellín.

For the six months ended June 30, 2020, 67.1% and 26.1% of our revenues were derived from operations in Lima and Medellín, respectively. As such, our results of operations are particularly dependent on economic conditions in these cities and the ability of patients in these cities to afford our healthcare services or purchase our oncology plans, as applicable. In addition, any earthquakes or other natural disasters, or any other disruptive occurrences such as political or social unrest, sustained power failures, or outbreaks of epidemics or pandemics, such as the novel coronavirus outbreak, that have a negative impact on our infrastructure in these cities could have a disproportionate impact on our ability to provide healthcare services to our patients. As a result, if Lima or Medellín experience a decline in economic conditions or a serious natural disaster, it could have a material adverse effect on our business, financial condition and results of operations.

Corruption and ongoing high-profile corruption investigations may hinder the growth of the Peruvian or Colombian economy and have a negative impact on our business and results of operations.

Peruvian and Colombian authorities are currently conducting several high-profile corruption investigations relating to the activities of certain Brazilian companies and their regional partners in the construction and infrastructure sectors, which have resulted in suspension or delay of important infrastructure projects, which were otherwise operational or permitted. These investigations have resulted in political turmoil in both Peru and Colombia. For example, in 2018 Peru suffered its worst institutional crisis since 2000 due to, among other factors, the resignation of former President Pedro Pablo Kuczynski, several corruption scandals involving other previous presidents, political candidates, prominent members of the judicial system and the district attorney’s office (each of whom is currently facing prosecution).

Similarly, on January 12, 2017, the Colombian Fiscalía General de la Nación initiated a corruption investigation into the activities of Odebrecht and its local partners. While the investigation is ongoing, to date, five individuals have been convicted, including two former public officials. These investigations involve Corficolombiana, a subsidiary of Grupo Aval, one of Colombia’s largest financial institutions and its former CEO José Elias Melo. On September 14, 2018, the SIC initiated a corruption investigation in Colombia into Corficolombiana’s actions in relation to the adjudication of the Ruta del Sol II highway concession. Meanwhile, on December 6, 2018, the Administrative Tribunal of Cundinamarca imposed on Episol (a Corficolombiana subsidiary) and others a fine of COP8.0 billion (US$212.8 million) to be paid jointly and severally for the damages caused to popular rights (access to public services, free competition, public morality) as a result of the alleged corruption acts involving the Ruta del Sol II agreement. This decision was appealed and will be decided by the Council of State.

Nevertheless, the potential outcome of such investigations, or any other potential high profile corruption proceeding, on the relevant companies, projects involved or Peruvian or Colombian government officials is

 

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uncertain. We cannot predict how long these or other corruption investigations may continue or whether new allegations against Peruvian or Colombian government officials or other companies with operations in Peru or Colombia will arise in the future. We cannot predict how these or future corruption scandals or investigations may affect the Peruvian or Colombian economy and indirectly have a material adverse effect on our business, financial condition and results of operations.

The political and economic conditions in Venezuela could have an adverse impact on the Peruvian and Colombian economies.

Venezuela, under the rule of President Nicolas Maduro, has suffered economic collapse and mass emigration since 2015. In connection with this mass emigration, approximately 1.7 million Venezuelans had entered Colombia and approximately 860,000 had entered Peru as of the end of 2019. The influx of migrants to Colombia and Peru has put strains on both countries and threatens to increase political and economic instability and social conflict in the region. Any negative impact from the migrant crisis on the political and economic stability of Colombia or Peru could have a material adverse effect on our business, financial condition and results of operations.

Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect the market price of many Latin American securities, including our ADSs.

The market value of securities issued by companies with operations in the Andean region, including Peru and Colombia, may be affected to varying degrees by economic, political and market conditions in other countries, including other Latin American and emerging market countries. Although macroeconomic conditions in such Latin American and other emerging market countries may differ significantly from macroeconomic conditions in Peru and Colombia, investors’ reactions to developments in these other countries may have an adverse effect on the market values of our securities. For example, in recent months, political and social unrest in Latin American countries, including Ecuador, Chile, Bolivia and Colombia has sparked political demonstrations and, in some instances, violence. In October 2019, presidential elections were held in Bolivia, Uruguay and Argentina, which resulted in controversial outcomes in Bolivia and Uruguay, including violent protests and claims of fraudulent elections in Bolivia and a runoff election in Uruguay, and the transition of the political party in power in Argentina. As a result of this political turmoil, investors have viewed investments in Latin American with heightened caution in recent months and further turmoil could have an adverse effect on the market price of the ADSs. Similarly, economic problems in emerging market countries outside of Latin America (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998 and the Turkish and South African crises of 2018), have also caused investors to view investments in emerging markets more generally with heightened caution. Crises in world financial markets, such as those of 2008, could affect investors’ views of securities issued by companies that operate in emerging markets. Crises in other emerging market countries may hamper investor enthusiasm for securities of Peruvian issuers, including the ADSs, which could adversely affect the market price of our ADSs. This could also make it more difficult for us and our subsidiaries to access the capital markets and finance our operations in the future on acceptable terms, or at all.

Increased inflation in Peru or Colombia could have an adverse effect on the Peruvian and Colombian economies generally and, therefore, on our business, financial condition and results of operations.

In the past, Peru and Colombia both have suffered through periods of high inflation and hyperinflation, which has materially undermined their economies and their respective governments’ ability to create conditions that support economic growth. High inflation and hyperinflation have the effect of making our services more expensive for our patients and decreasing their ability to afford our services. Any such impact on the Peruvian or Colombian economy from inflation may have a material adverse effect on our business, financial condition and results of operations.

 

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Variations in foreign exchange rates may adversely affect our financial condition and results of operations.

The Peruvian and Colombian currencies have fluctuated against the U.S. dollar, each other and other foreign currencies over the last four decades. For the six-month period ending June 30, 2020, we generated 73.9% of our revenues in Peruvian soles and 26.1% of our revenues in Colombian pesos. Our consolidated statement of income and other comprehensive income is presented in Peruvian soles and is impacted by the translation of income and expenses of transactions in Colombian pesos to Peruvian soles. The Colombian peso has been volatile in recent years, which in turn creates volatility in our results of operations. In particular, the Colombian peso experienced significant depreciation against both the U.S. dollar and the Peruvian sol in March and April 2020 as a result of the collapse in energy markets. Fluctuations in the exchange rates of the Colombian peso to the Peruvian sol could impair the comparability of our results from period to period and depreciation in such exchange rate could have a material adverse effect on our results of operations and financial condition.

We are also exposed to the foreign exchange rate risk associated with our U.S. dollar-denominated debt. Although we have entered into hedging arrangements with respect to all of our U.S. dollar-denominated debt, we recognize gains and losses from this debt and the related hedging instruments resulting from exchange rate differences between Peruvian soles, Colombian pesos and U.S. dollars in profit or loss. For more information see Note 26 to our audited consolidated financial statements.

Depreciation of the Colombian peso against the Peruvian sol or the Peruvian sol or Colombian peso against the U.S. dollar and/or other currencies may therefore adversely affect our business, financial condition and results of operations.

Changes in tax laws in Peru or Colombia may increase our tax liabilities and, as a result, have a material and adverse effect on us.

The Peruvian government regularly implements changes to its tax regulations and interpretations. Potential changes may include modifications in the taxable events, the taxable bases or the tax rates, or the enactment of temporary taxes that, in some cases, could become permanent taxes. These changes could, if enacted, indirectly affect us. For instance, the Peruvian government has recently introduced several changes related, among others, to thin capitalization rules, indirect transfer of shares and the concept of permanent establishment.

On May 7, 2019, the Peruvian government approved regulations establishing substantive and procedural provisions for the application of the General Anti-Avoidance Rule (“GAAR”), lifting the suspension in place since 2014. Subsequent guidance published by the Superintendencia Nacional de Aduanas y de Administracion Tributaria (“SUNAT”) clarified that the GAAR may be applied to transactions occurring on or after July 19, 2012, the date that GAAR became effective, including during the time in which its application was suspended. GAAR gives SUNAT the power to reclassify certain transactions that are exclusively performed in a manner solely driven by tax reasons, resulting in tax savings or advantages that otherwise would not have been available. As a result, GAAR may have an impact on our taxable base.

In addition, through the enactment of Urgent Decree No. 005-2019, the Peruvian government modified and extended the application of the tax exemption on capital gains derived from the sale of securities through the BVL until December 31, 2022.

We are currently unable to estimate the impact that such reforms may have on our business. The effects of any tax reform that could be proposed in the future and any other changes that could result from the enactment of additional reform or changes in interpretation have not been, and cannot be, quantified. Any changes to the Peruvian tax regime may increase our and our subsidiaries’ tax liabilities or overall compliance costs, which could have a material adverse impact on our business, financial condition and results of operations.

The Colombian government also regularly implements changes to its tax regulations and interpretations. Colombia has gone through four tax reforms in the last six years, but the Colombian government continues to

 

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face serious budgetary constraints and pressure from rating agencies that could lead to future tax reforms, with potential adverse consequences on our financial results. On December 27, 2019, a tax reform was implemented by means of Law 2010 of 2019 intended to strengthen the mechanisms to prevent tax evasion and introduced other substantial changes to the then-existing tax legal framework. As a result, payments made to foreign entities are subject to an income tax withholding rate of 20%, however, this general rate does not apply to foreign indebtedness exceeding one year, in which case the applicable income tax withholding is 15%. Dividends paid by our subsidiaries to us out of profits that were previously subject to corporate income tax are subject to a withholding tax of 10% (increased from 7.5% in 2019 and 5% in 2018) and dividends paid out of profits that were not previously subject to corporate income tax are now subject to a withholding tax of 32% for 2020, 31% for 2021 and 30% for 2022, plus the foregoing 10%, which applies to any amount remaining after the 32%, 31% or 30% withholding is applied, in accordance with the applicable taxable year.

We cannot assure you that Peruvian or Colombian tax laws will not change or may be interpreted differently by authorities, and any change could result in the imposition of significant additional taxes or increase our current tax liabilities. Differing interpretations could result in future tax litigation and associated costs. Moreover, the Peruvian and Colombian governments have significant fiscal deficits that may result in future tax increases. Additional tax regulations could be implemented requiring additional tax payments, negatively affecting our business, financial condition and results of operations.

Risks Relating to the Offering and Our ADSs

The market price of our ADSs may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at or above the price you paid for them. The market price and liquidity of the market for our ADSs may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, among others:

 

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actual or anticipated changes in our results of operations, or failure to meet expectations of financial market analysts and investors;

 

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investor perceptions of our prospects or our industry;

 

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operating performance of companies comparable to us and increased competition in our industry;

 

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new laws or regulations or new interpretations of laws and regulations applicable to our business;

 

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general economic trends in Peru and Colombia, and Latin America in general;

 

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catastrophic events, such as earthquakes and other natural disasters; and

 

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developments and perceptions of risks in Peru, Colombia and other emerging markets.

Following the completion of the offering, Enfoca, our controlling shareholder, will own approximately     % of our class B shares and     % of our class A shares and certain of our officers and a majority of our directors may be employed by or otherwise affiliated with Enfoca, which could give rise to potential conflicts of interest.

As of June 30, 2020, Enfoca, our controlling shareholder held approximately 69.5% of our outstanding shares and voting power. Following the completion of this offering, our controlling shareholder will own approximately     % of our class B shares and     % of our class A shares, and as such, will continue to be our controlling shareholder following the completion of the offering. All class B shares will be held in trust under the Trust Agreement, pursuant to which the trustee will vote all class B shares held in trust as directed by Enfoca irrespective of Enfoca’s aggregate ownership of our common stock at any given time. See “Description of Our Share Capital—Trust Agreement.” As a holder of ADSs representing class A shares, you will only be entitled to vote on only certain matters submitted to a vote of the shareholders. As a result of its

 

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ownership of the majority of our class B shares and class A shares and its right to direct the voting of all or substantially all of the class B shares and a significant portion of the class A shares, Enfoca will have the power to, among other matters, elect all the members of the board of directors and decide upon major corporate transactions, such as a corporate reorganization or acquisitions and divestments of assets under the terms of the Ley General de Sociedades – Law N° 26887 (the “Peruvian Corporations Law”) and our by-laws. Enfoca will retain this control over significant corporate matters for as long as it, either by itself or together with Mr. Pinillos Casabonne, holds in the aggregate at least 10% of the outstanding class A shares. See “Description of Our Share Capital.” As a result, Enfoca may use its significant influence over our business without regard to the interests of other shareholders, including in ways that could have an impact on your investment in the ADSs.

In addition, certain of our officers and a majority of our directors may be employed by or otherwise affiliated with Enfoca. Although these directors and officers attempt to perform their duties within each company independently, such employment relationships and affiliations could give rise to potential conflicts of interest when a director or officer is faced with a decision that could have different implications for the two companies. These potential conflicts could arise, for example, over matters such as the desirability of changes to our business and operations, funding and capital matters, regulatory matters, matters arising with respect to agreements with Enfoca, board composition, employee retention or recruiting, labor, tax, employee benefit, indemnification and our dividend policy and declarations of dividends, among other matters.

Holders of ADSs may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable results to the plaintiff(s) in any such action.

The deposit agreement governing our ADSs provides that holders of ADSs, including purchasers in secondary transactions and holders of ADSs that withdraw their class A shares, waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our class A shares, the ADSs or the deposit agreement, including any claim under U.S. federal securities laws. If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. As a result of the jury waiver provision, it may also be more costly for you to bring a claim against us or the depositary, including a claim for a breach of the U.S. federal securities laws. Moreover, if a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of

 

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compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

You may not be able to sell ADSs you own or the class A shares underlying the ADSs at the time or the price you desire because an active or liquid market for these securities may not develop.

Prior to this offering, there has been no public market for our ADSs or for our class A shares underlying our ADSs. We intend to apply to list our ADSs on the NYSE and we intend to apply to list our class A shares on the BVL. We cannot predict whether an active, liquid public trading market for our ADSs will develop or be sustained. Active, liquid trading markets generally result in lower price volatility and respond more efficiently to orders from investors to purchase or sell securities. Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. We expect     % of our class A shares to be held by unrelated parties following this offering. In addition, although ADS holders will be entitled to withdraw class A shares underlying our ADSs from the depositary at any time, the BVL is generally a less liquid trading market than major world equity securities markets.

Substantial sales of ADSs or class A shares after this offering could cause the price of our ADSs or class A shares to decrease.

Our existing shareholders will hold a large number of our common shares after this offering. We and our existing shareholders will agree with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC not to offer, sell, contract to sell or otherwise dispose of or hedge any class A shares, class B shares or ADSs, without the prior written consent of Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, during the 180 days following the date of this prospectus, subject to certain exceptions. After this 180-day period expires, these securities will be eligible for sale. The market price of our ADSs could decline significantly if we or our existing shareholders sell securities of our company or the market perceives that we or our existing shareholders intend to do so.

The disparity in the voting rights among the classes of our shares may have a potential adverse effect on the value of the ADSs, and may limit or preclude your ability to influence corporate matters.

The class A shares underlying the ADSs are only entitled to vote (together with the class B shares) on the following matters submitted to a vote of the shareholders: approval of financial statements; approval of capital increases or reductions (other than as described below); appointment, or delegation to our board of directors of the appointment, of our independent auditors; and payment of dividends. The class A shares will not have voting rights on any other matter subject to shareholders’ approval.

As a result of the foregoing, the class A shares, including any ADSs representing the class A shares, will not be entitled to vote on, among other matters, the election and removal of directors and setting of directors’ compensation; our issuance of debt securities; amendments to our by-laws (other than in connection with capital increases or reductions); the sale, in a single transaction, of assets with a value exceeding 50% of our share capital; the merger, spin-off, division, reorganization, transformation or dissolution of the Company; and special investigations and audits.

In September 2020, our shareholders delegated to our board of directors the authority to approve one or more capital increases of up to S/236,546,679, which delegation will remain in place for five years thereafter and will allow our board of directors to determine the timing, amount, and conditions of each such capital increase, without requiring further shareholders’ approval. This approval also included an express advanced waiver of any preemptive rights that would apply in connection with any such capital increases. This delegation may only be revoked by a vote of the class B shares.

Because of the difference in voting rights between our class B and class A shares, the holders of our class B shares will control significant matters submitted to our shareholders following this offering. The different voting

 

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rights of our class A shares and class B shares will remain in effect until Enfoca and Mr. Pinillos Casabonne own in the aggregate less than 10% of the outstanding amount of class A shares. This will limit or preclude your ability to influence corporate matters for the foreseeable future, which may have an adverse impact on the value of the ADSs.

Holders of ADSs may be unable to exercise voting rights with respect to our class A shares underlying the ADSs at our shareholders’ meetings.

As a holder of ADSs representing class A shares being held by the depositary on your behalf, you may exercise voting rights with respect to the class A shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. Holders of our class A shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Peru, a Peruvian newspaper of general circulation, the daily bulletin of the BVL and through the website of the SMV, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders will not receive notice directly from us. Instead, pursuant to the deposit agreement, we will notify the depositary, who will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given. To exercise your voting rights, you must instruct the depositary how to exercise the voting rights for the class A shares which underlie your ADSs. Due to these additional procedural steps involving the depositary, the ADS holders may not be able to exercise such voting rights on time.

Holders of ADSs also may not receive voting materials in time to instruct the depositary to vote the class A shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out such instructions, unless such failure can be attributed to negligence or bad faith on the part of the depositary or its agents. Accordingly, you may not be able to exercise voting rights, and you will have little, if any, recourse if the underlying class A shares are not voted at all or as requested.

Holders of ADSs may be unable to exercise preemptive or accretion rights with respect to the class A shares underlying their ADSs.

Under the Peruvian Corporations Law, if we issue new class A shares as part of a capital increase, our shareholders will generally have the right to subscribe to a proportional number of common shares of the class held by them to maintain their existing ownership percentage, which is known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed common shares of the class held by them or, if expressly provided for in our by-laws or approved by our shareholders, other classes that remain unsubscribed at the end of a preemptive rights offering, on a pro rata basis, which is known as accretion rights. See “Description of our Share Capital—Preemptive and Accretion Rights.” You may not be able to exercise the preemptive or accretion rights relating to class A shares underlying your ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the class A shares relating to these preemptive and accretion rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive and accretion rights by the depositary or, if the preemptive and accretion rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of our ADSs may suffer dilution of their interest in our company upon future capital increases.

We are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, without the prior consent of the ADS holders.

We are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. Any change related to an increase in deposits or

 

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charges for book-entry securities services or any modification that might hinder the rights of the ADS holders will be effective 30 days after the ADS holders have received notice of such change or modification and such holders will have no right to any compensation whatsoever.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our ADSs less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed US$1.07 billion, if we issue more than US$1.0 billion in nonconvertible debt in a three-year period or if the fair value of our common shares held by non-affiliates exceeds US$700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our ADSs less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and the market price of our ADSs may be more volatile.

Our by-laws provide that the courts of Peru will be the exclusive forum for the resolution of all shareholder complaints other than complaints asserting a cause of action arising under federal or state securities laws of the United States, and that the United States District Court for the Southern District of New York will be the exclusive forum for the resolution of any shareholder complaint asserting a cause of action arising under federal or state securities laws of the United States.

Our by-laws provide that the courts of Peru will be the exclusive forum for resolving all shareholder complaints other than shareholder complaints asserting a cause of action arising under federal or state securities laws of the United States, and that the United States District Court for the Southern District of New York will be the exclusive forum for resolving any shareholder complaint asserting a cause of action arising under federal or state securities laws of the United States, including applicable claims arising out of this offering. These choice of forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Additionally, our shareholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find either choice of forum provision contained in our by-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

Peru has different corporate disclosure and accounting standards than those you may be familiar with in the United States.

Financial reporting and securities disclosure requirements in Peru differ in certain significant respects from those required in the United States. There are also material differences among IFRS and U.S. GAAP. Accordingly, the information about us available to you will not be the same as the information available to holders of shares issued by a U.S. company. In addition, the Peruvian Securities Market Law, which governs open or publicly listed companies, such as us, imposes disclosure requirements that may be more limited than

 

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those in the U.S. in certain important aspects. Although Peruvian law imposes restrictions on insider trading and price manipulation, applicable Peruvian laws are different from those in the United States, and the Peruvian securities markets may not be as highly regulated and supervised as the U.S. securities markets.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

We are a “foreign private issuer” within the meaning of the rules under the Securities Act. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Peruvian practices concerning corporate governance (which are not mandatory under Peruvian regulations) and intend to continue to do so. Accordingly, holders of our ADSs may not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

For example, NYSE listing standards provide that the board of directors of a U.S.-listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors.

The listing standards for NYSE also require that U.S.-listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors.

In addition, NYSE rules require the independent non-executive directors of U.S.-listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.

The NYSE listing standards also require U.S.-listed companies to adopt and disclose corporate governance guidelines. In July 2002, the SMV and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Principles of Corporate Governance for Peruvian Companies.” Although we have implemented a number of these measures, we are not required to comply with the corporate governance guidelines by law or regulation.

As a foreign private issuer, we are exempt from certain provisions applicable to U.S. domestic public companies.

As a foreign private issuer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. The information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, holders of our ADSs may not be afforded the same protections or information that would be made available to our shareholders if we were a U.S. company.

 

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Minority shareholders in Peru are not afforded equivalent protections as minority shareholders in other jurisdictions, such as the United States, and investors may face difficulties in commencing judicial and arbitration proceedings against our company or the controlling shareholder.

Our company and the controlling shareholder are organized and existing under the laws of Peru, and a majority of our directors and all of our officers reside in Peru or Colombia. Accordingly, investors may face difficulties in serving process on our company, our directors and officers or the controlling shareholder in other jurisdictions, and in enforcing decisions granted by courts located in other jurisdictions against our company, our directors and officers or the controlling shareholder that are based on securities laws of jurisdictions other than Peru.

In Peru, there are no proceedings to file class action suits or shareholder derivative actions with respect to issues arising between minority shareholders and an issuer, its controlling shareholders or directors and officers. Furthermore, the procedural requirements to file actions by shareholders differ from those of other jurisdictions, such as in the United States. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors, officers or controlling shareholder as compared to the shareholders of a U.S. company. The deposit agreement provides that the depositary has no obligation to commence or become involved in any judicial proceedings and any other legal actions relating to the ADSs or the deposit agreement, either on behalf of the ADS holders or on behalf of any other person.

Judgments of Peruvian courts with respect to our class A shares will be payable only in soles.

If proceedings are brought in the courts of Peru seeking to enforce our obligations in respect of the class A shares, we will have the right to discharge our obligations in soles. Under Peruvian law, an obligation in Peru to pay amounts denominated in a currency other than soles and except where there is express agreement to the contrary, may be satisfied in Peruvian currency at the exchange rate published by the SBS. The then-prevailing exchange rate may not afford non-Peruvian investors with full compensation for any claim arising out of or related to our obligations under the ADSs.

You will experience immediate and substantial dilution in the book value of the class A shares and ADSs you purchase in this offering.

Because the initial offering price of the ADSs being sold in this offering will be substantially higher than our net tangible book value per common share, you will experience immediate and substantial dilution in the book value of the class A shares underlying your ADSs. Net tangible book value represents the amount of our tangible assets on an adjusted basis, minus our total liabilities on an adjusted basis. As a result, at the assumed initial public offering price of US$                per ADS (based on the midpoint of the price range set forth on the cover page of this prospectus), we currently expect that you will incur immediate dilution of US$                per ADS if you purchase in this offering (assuming no exercise of the underwriters’ option to purchase additional ADSs).

Our newly issued class A shares from this offering will initially be represented by certificados provisionales and you will not be able to cancel your ADSs and withdraw the deposited class A shares until the definitive class A shares are issued.

In accordance with Peruvian law, our class A shares underlying the ADSs will be represented by preliminary stock certificates (certificados provisionales) until the capital increase allowing for the issuance of such class A shares is recorded in the Corporations Public Registry. We cannot assure you that the Corporations Public Registry will not delay the recording of our capital increase. Once the capital increase has been recorded, we will issue definitive stock certificates in exchange for the preliminary stock certificates. Only after the capital increase has been recorded with the Corporations Public Registry, and we have issued definitive stock certificates in exchange for the preliminary stock certificates, will you be able to cancel your ADSs and withdraw the deposited class A shares.

 

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Our ADSs may not be a suitable investment for all investors, as an investment in ADSs presents risks and the possibility of financial losses.

The investment in our ADSs is subject to risks. Investors who wish to invest in ADSs are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to the class A shares, the Company, the industry in which we operate, our shareholders and the general macroeconomic environment in Peru and Colombia, among other risks. Each potential investor in ADSs must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

 

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have sufficient knowledge and experience to make a meaningful evaluation of the ADSs, the merits and risks of investing in ADSs and the information contained in this prospectus or any applicable supplement;

 

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have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in ADSs and the impact the shares will have on its overall investment portfolio;

 

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have sufficient financial resources and liquidity to bear all of the risks of an investment in the ADSs; and

 

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understand thoroughly the terms of ADSs and be familiar with the behavior of any relevant indices and financial markets; and be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately US$        million, or US$        million if the underwriters exercise their option to purchase additional ADSs in full. These amounts assume an initial public offering price of US$        per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. We currently intend to use the net proceeds from this offering for general corporate purposes, including acquisitions, expansion of our existing facilities, other capital expenditures and the repayment of indebtedness from time to time.

We routinely evaluate acquisition and investment opportunities that are aligned with our strategic goals, so we may also acquire, or invest in, businesses or assets that are complementary to our core business. However, we do not have agreements or commitments to enter into any acquisitions at this time. We also routinely evaluate opportunities to expand existing facilities as an important part of our growth plan. We cannot assure you that we will find opportunities that we consider to be favorable to us, whether we will be able to take advantage of such opportunities should they arise, or the timing of and funds required by such opportunities. In addition, we expect to finance these opportunities with a combination of cash on hand, net proceeds from this offering, new borrowings and/or financial contributions from partners, depending on a variety of commercial considerations at such time. Accordingly, we will have significant flexibility in applying the net proceeds from this offering. As a result, our actual use of proceeds from this offering could vary significantly from the currently expected use.

Each US$1.00 increase (decrease) in the assumed initial public offering price of  US$        per ADS, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately US$        million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. Each increase (decrease) of 1.0 million shares in the number of ADSs sold by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately US$        million, assuming the assumed initial public offering price of  US$        per ADS, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DIVIDENDS

Dividend Policy

Our dividend policy has historically been to distribute up to S/10 million per year of our net profit obtained from the preceding year. Following this offering, we intend to retain all available funds and future earnings, if any, to fund the expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will be subject to approval by holders of our class A shares and class B shares voting together at our annual shareholders’ meeting. Any determination by our board of directors to recommend for approval the declaration and payment of dividends will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our dividend policy notwithstanding, under Peruvian law, shareholders representing 20% of our outstanding common shares have the right to compel us to distribute at least 50% of the net profit of the previous fiscal year.

Each share of our common stock represents the same economic interest, except that, as provided in our by-laws, the class A shares benefit from the right to receive a preferred dividend consisting of 100% of any dividends distributed until we have distributed US$1 billion (or its equivalent in soles) in the aggregate in cash dividends.

Under the Peruvian Corporations Law, companies may distribute up to 100% of their profit (after payment of income tax) subject to a mandatory 10% legal reserve requirement until the legal reserve equals 20% of shareholders’ equity and provided that no accumulated losses exist. According to Article 40 of the Peruvian Corporations Law, in order to distribute dividends, profits must be determined based on the individual financial statements of the company.

In order to allow for the settlement of securities, under the rules of the SMV, investors who purchase shares of a listed company will have the right to receive the dividend payment, provided that such transaction has been executed by the corresponding cutoff date (fecha de corte). Holders of shares are not entitled to interest on accrued dividends. In addition, under Article 232 of the Peruvian Corporations Law, the right to collect dividends declared by a company expires three years after the original dividend payment date (unless, like us, it is a publicly held company, in which case the right to collect dividends declared by the company would expire ten years after the original dividend payment date).

Subject to the terms of the deposit agreement, holders of our ADSs will be entitled to receive dividends, if any, paid on the class A shares represented by the ADSs. Cash dividends on our class A shares will be paid in soles and will be converted by the depositary into U.S. dollars and paid in U.S. dollars to the holders of ADSs, net of fees, expenses and any taxes. Under Peruvian law, dividends are subject to a withholding tax of 5% if paid to non-Peruvian holders. See “Description of American Depositary Shares.”

Because we are a holding company and all of our business is conducted through our subsidiaries, we pay, and we expect to continue paying, dividends, if any, from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to shareholders is dependent on the earnings of, and dividends and other distributions from, our subsidiaries. The ability of our subsidiaries to make distributions to us may be restricted by law or by the terms of our existing or future indebtedness. For example, four of our subsidiaries, Medic Ser, Oncocenter, Oncosalud S.A.C. and GSP Servicios Generales, each applied for and received a loan of S/10 million and Clínica Vallesur S.A. applied for and received a loan of S/7.5 million, in each case under a loan relief program offered by the Peruvian government in response to the COVID-19 pandemic. Such loans restrict these subsidiaries’ ability to pay dividends to us during the term of each loan, which are up to 36 months. Although the restrictions on these subsidiaries’ ability to pay dividends to us have not to date had a material impact on our liquidity or capital resources, we cannot assure you that our subsidiaries will not need to take out similar loans in the future, or that the agreements governing our existing or future indebtedness will permit our subsidiaries to provide us with

 

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sufficient dividends or distributions or permit us to loan money or enter into other similar arrangements to fund dividend payments. See “Risk Factors—Risks Related to Our Business—We are a holding company and all of our operations are conducted through our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends and make other distributions to us.”

In 2019 and for the first six months of 2020, we paid dividends to our shareholders of S/10 million (or US$2.8 million) and S/5.0 million (or US$1.4 million), respectively. These amounts were approved at our annual shareholders’ meetings during each year.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020:

 

•

on an actual basis; and

 

•

as adjusted to give effect to net proceeds amounting to US$         (S/            ) for the sale of our ADSs in the offering, which reflects the sale of             ADSs at an assumed initial public offering price of US$         per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

The as adjusted information in the table below assumes no exercise of the underwriters’ option to purchase additional ADSs.

The table below should be read in conjunction with “Presentation of Financial and Other Information,” “Selected Financial and Other Information,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements included in this prospectus.

 

		As of June 30, 2020
		Actual								As Adjusted
		(in millions of US$)(1)				(in millions of S/)				(in millions of US$)(1)				(in millions of S/)
Loans and borrowings (current portion)(2)		$	75.3			S/	267.0			$				S/
Loans and borrowings (non-current portion)(2)			141.0				499.7
Total loans and borrowings			216.3				766.7
Total equity			144.6				512.5
Total capitalization		$	361.0			S/	1,279.2			$				S/

 

(1)	Calculated based on an exchange rate of S/3.5437 to US$1.00 as of June 30, 2020.

(2)	As of June 30, 2020, we had S/527.0 million (US$148.7 million) guaranteed secured loans and borrowings and S/239.6 million (US$67.6 million) guaranteed unsecured loans and borrowings.

 

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